Two years after the lives of central bankers were radically changed, the task before them is still a diabolical one. For more than a decade his main concern was: to fight inflation persistently failing to reach your goal (2% over the medium term, considered optimal to promote healthy economic growth). However, in the summer of 2021, there was an inflation shock that still remained unresolved despite 24 months under its feet. Price growth has slowed but remains well off target. And the dilemma facing monetary authorities right now is: how long should it be stored interest rates LONG Regardless of whether we raise them a little more, given the risk that their decisions will lead to a more or less serious recession.
This will certainly be one of the main themes of the Kansas City Federal Reserve’s 46th annual meeting of central bankers since 1978, held Thursday through Saturday in Jackson Hole, Wyoming. The highlight is the intervention of the national Federal Reserve (FED) chairman Jerome Powell and the European Central Bank (ECB) chairman Christine Lagarde on Friday afternoon (Spain time). After annual maximums at the end of July, Major global stock markets fell by around 5% on average in AugustBecause investors are looking forward to the messages they can send.
This Federal ReserveThus, it has increased the price of money by 5.25 percentage points since March 2022.It rose to the 5.25%-5.5% range, the highest level in 22 years. Powell, who increased interest rates by 0.25 points in July after the pause in June, left the door open to either increase interest rates again or not to change it from the 19-20 September meeting. “There are reasons to think inflation could come down right now, but it’s still pretty high, so we think we need to keep going and we think we should.” keeping (monetary) policy in restrictive territory for a while,” he said.
durable economy
The overall CPI of the United States has moderated markedly from its peak of 9.1% in mid-2022. Of course, it showed a slight increase from 3% in June to 3.2% in July. More volatile energy and food prices, on the other hand, fell by a tenth month on month to 4.7%. So the Fed’s policy seems to be paying off, and before the economy suffers as much as feared.. While GDP grew 0.5 percent in the first quarter and 0.6 percent in the second quarter, the unemployment rate fell to 3.5 percent in July, approaching the lowest level in the last 50 years.
Resisting the economy There is room for the US central bank to raise interest rates again If a further reduction in inflation is deemed necessary, it should be noted that it takes several quarters for any increase in the price of money to take full effect. “Our baseline scenario still points to a recession towards the end of the year, but it will likely be more superficial than expected,” said Paolo Zanghieri of Generali Investments. “Fed should pause after rate hike in July, but sticky inflation may require another rate hike in September. We do not see any outages until the end of the first quarter of 2024It is one of the biggest doubts of the market when these rate cuts can take place to reinvigorate the economy once inflation is reined in.
This The situation in the Eurozone is even more complexBecause the price increase remains at a higher level. After reaching a maximum of 10.6% in October, the overall CPI slowed and fell to 5.3% in July from 5.5% in June. However, the key indicator remained at 5.5% for the second month in a row, remaining above May (5.3%) and just below the maximum reached in March (5.7%). Moreover, The economy is growing less than in the United States: After remaining stable in the first quarter of 2022 and decreasing by 0.1% in the last quarter, it may contract by 0.3% in the second quarter, while the latest data indicate that it may contract by 0.2% in the third quarter. Unemployment remains at historic lows, but at 6.4%, nearly double that of the United States.
Worst-case scenario for the ECB
The combination of high inflation and a weak economy makes the scenario even more difficult for the ECB than for the Fed. “The situation is further complicated as concrete signs of a decline in inflation appear in the US without any significant loss of momentum in the real economy, while in the Eurozone, uncertain data point to a decline.” There will be further deterioration in activity in the coming months, but there will not be much relief on the core inflation side.. “The market is currently pricing in more monetary tightening in the Eurozone than in the US, which reinforces the risk of a hard landing in Europe,” said Chris Iggo, AXA Investment Manager.
ECB takes action Raised interest rates later than the Fed (in July 2022) and lowered it further (to 4.25%, a 15-year high). After raising 0.25 points in July, Lagarde also left the door open for re-raising or keeping it out of the September 14 meeting. “Our future decisions will ensure that official ECB interest rates are kept at sufficiently restrictive levels for as long as necessary,” the senior French official said, noting that in previous meetings this phrase was pretty much the same, but used with another verb: “restricted enough.” This is the key point; How long can central banks suppress activities to reduce inflation without seriously damaging the economy?