The decisions of the largest central banks, the Fed and the ECB, have one thing in common, besides the increase in interest rates by 25 basis points, and that is that in their announcements there is no guidance for their next moves in the exercise of monetary policy.
Central banks are taking a “study the data and then make the decisions” approach, knowing that the impact of rate hikes on the real economy takes time to be seen. It was pointed out two months ago by the governor of the Bank of Japan (BOJ), Kazuo Ueda, as the host of the meeting of the central bankers of the G7 group in Niigata, Japan. “Participants seemed to share the view that the impact of past interest rate hikes has yet to be fully felt in their economies and inflation and could start to be felt more in the future,” Japan’s central banker said at a press conference following the meeting. “Many said they wanted to guide monetary policy with that assessment in mind,” he added.
The Fed
Steadfast that the Federal Reserve will decide monetary policy by looking at all the data and especially inflation at each meeting, Chairman Jerome Powell said on Wednesday at the usual press conference that follows the conclusion of the two-day meeting of the Federal Reserve Open Market Committee (FOMC). “We will continue to take an data-driven approach to determine the extent of policy tightening that may be appropriate,” he said in opening remarks to media after the central bank raised interest rates by 25 basis points. . “We have covered a lot of ground and the full effects of our tightening are yet to be felt,” he added.
The US central banker became even more descriptive in response to a reporter’s question, saying the central bank could raise interest rates again or keep them steady in September, depending on what new economic data shows.
“I would say that it is certainly possible that we will raise rates again at the September meeting if the data warrants it,” he said “And I would also say that it is likely that we will choose to hold them steady. And we will make careful assessments from meeting to meeting.” He added that the FOMC did not provide any guidance on the possibility of further rate hikes at future meetings.
The ECB
The European Central Bank took over the following day, withdrawing guidance that borrowing costs would continue to rise.
ECB President Christine Lagarde confirmed after the meeting that the ninth rate hike in a row could be the last, saying that at its next policy meeting in September the ECB could raise rates or pause. “It’s a decisive maybe,” Lagarde said, summing up her more neutral approach.
The estimates of investors and analysts
Investors and analysts took the shift in rhetoric as a clear signal that interest rates in both the US and the eurozone were now at their peak or that we are very close to the end of the rate hike cycle.
Financial data can justify the shift. Inflation has been falling for months on both sides of the Atlantic. In the US it reached 3% in June, while in the eurozone it fell to 5.5% and a further drop is expected when the July figures are announced on Monday.
US economy vs Eurozone economy
The economy in the eurozone is also weakening rapidly. Output has stagnated in the past two quarters and is expected to grow at best at a very modest pace in the second quarter, when GDP data is released. There are fears of further weakness in the third quarter, as surveys released last week showed a sharp decline in private sector activity.
Inflation is easing and eurozone GDP is not looking good at all.
The US economy is performing better. The Fed upgraded economic growth to “modest” from “smooth” while US GDP beat expectations as it rose 2.4% year-on-year in the second quarter.
Powell warned that the resilience of the US economy may mean more tightening is needed to tame inflationary pressures, saying “stronger growth could lead over time to higher inflation.” Although he added: “We have covered a lot of ground and the full effects of the tightening are yet to be felt.”
Lagarde made it clear on Thursday July 27 that the ECB will keep an “open mind” on whether more tightening is needed. “The burden of proof will fall on the data,” he said, raising the possibility that the ECB could skip a meeting before resuming rate hikes later, as the Fed did last month.
Much will depend on CPI growth data for July and August, as well as the ECB’s own inflation forecasts to be released shortly after its September meeting. But Lagarde said she would also look at data on the labor market, investment and inflation expectations.
Lagarde gave a balanced view of the inflation outlook. Russia’s withdrawal from the deal allowing Ukraine to export grain from its Black Sea ports could create “new upward pressures” on food prices, he warned, as could “the evolving climate crisis.” Higher-than-expected growth in wages or profit margins could also keep inflation high.
However, she said the eurozone’s near-term economic outlook had “deteriorated, mainly due to weaker domestic demand”, adding that this should reduce price pressures, especially if combined with falling energy prices.
The IMF
The International Monetary Fund was also mentioned last week in the reflection on how the monetary policy should be drawn from now on. In its report on the outlook for the global economy, the IMF noted that “risks to inflation are now more balanced and most advanced economies are less likely to need additional large increases in key interest rates”, adding, however, that it is very important to avoid their premature reduction, before there are clear and lasting signs of a reduction in structural inflation.
“We haven’t reached that point yet,” he noted. The Fund agrees that monetary policy should now be determined on the basis of the evidence, noting that it is very difficult to estimate with any certainty the level of the “neutral interest rate” and the time needed for monetary policy to affect the economy and inflation . Another analysis by the Fund’s executives noted that, although its baseline scenario does not foresee a recession in the US or the Eurozone, structural inflation is expected to last longer than the markets are discounting and, therefore, more monetary tightening may be needed. policy, i.e. other interest rate hikes.
