- Fed’s Powell sees pain, and ECB talks of sacrifice
- High inflation remains a challenge on both sides of the Atlantic
- Central bank autonomy under fire after missed call on inflation
The message from central bankers grew louder and clearer last week as officials used the Federal Reserve symposium at Jackson Hole to warn that measures to tame inflation will cause some pain.
Fed Chairman Jerome Powell said on Friday that the US central bank will keep raising interest rates and keep them high until supply and demand are in better balance.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.
Isabel Schnabel, an executive board member at the European Central Bank, followed up on Saturday with a warning that greater sacrifice will be required. François Villeroy de Galhau, head of the French central bank and a member of the ECB governing council, said central banks’ commitment to price stability is “unconditional,” in an echo of Powell’s remarks the day before.
Bond investors honored the hawkish pivot by the Fed and ECB with higher yields. The yield on two-year Treasury notes—which most closely track short-term rates—was 3.417% in late trading Monday after earlier hitting 3.489%, compared to Friday’s close of 3.39%.
Germany’s 10-year bond yield, which serves as a benchmark for the eurozone, stayed above 1.5% Monday, after tacking on nearly 20 basis points in Friday trading.
Philip Lane, the former governor of Ireland’s central bank who is now chief economist on the ECB executive board, called for a steady pace of increases as he continued his dovish stance, arguing this would be less disruptive than a few big hikes. He acknowledged, however, that Europe is in for a “prolonged phase” of high inflation.
The monthly reading on eurozone inflation is due out Wednesday, with the consensus forecast at a record 9%, as energy prices keep upward pressure on European inflation. July's inflation was 8.9% and June’s was 8.6%.
In the US, inflation, as measured by the personal consumption expenditures index, fell to 6.3% on the year in July, according to data released on Friday, compared to 6.8% in June. Following a similar decline in the consumer price index, the figure raised hopes, again, that inflation has peaked.
However, Powell made it clear in his speech that the Fed was not going to let up in its monetary tightening. It is an open question, though, whether the expected September hike will be 50 basis points or 75 basis points, and Powell said the size of the hike depends on the totality of data.
Cleveland Fed chief Loretta Mester said at Jackson Hole she is not leaning in either direction, but that she will be looking more closely at inflation data than employment. August CPI is due out a week before the September 20-21 meeting of the rate-setting Federal Open Market Committee, and the University of Michigan will publish its inflation expectations data beforehand as well.
Mester, who ranks as a hawk and is a voting member of the FOMC this year, said she is not convinced inflation is on a downward path and is not sure it has even peaked.
The tough talk from central bankers strikes many as coming too late. Powell said on Friday that failure to curb inflation now would lead to even more pain later, but many blame him and other Fed policymakers for not intervening a year ago and nipping inflation in the bud.
The missed call on inflation is prompting some politicians to question central bank autonomy on monetary policy. Historically, such independence has been prized to keep politics out of such sensitive matters, but the experience of the past year has raised doubts.
British Foreign Secretary Liz Truss, who is on track to become UK prime minister, has threatened changes at the Bank of England. In the U.S., the Fed is under attack from Republican Senator Pat Toomey, who argues policymakers have strayed too far from a focus on price stability, but also from Democratic Senator Elizabeth Warren, who urged Powell not to “drive this economy off a cliff.”
It may be central bank policymakers who are in for some pain, and not just their economies.