Inflation fight: Are central banks going too far, too fast? Chris Giles and Valentina Romei Sep 25, 2022 https://www.afr.com/policy/economy/...-banks-going-too-far-too-fast-20220925-p5bkrx London | With their bills sharpened and talons on display, the world’s central banks fully adopted the posture of the hawk this week. Backed by sharp rises in interest rates and currency intervention, they have used pointed language to advertise their singular aim of defeating the scourge of inflation. In one of the most sudden shifts in global economic policymaking in decades, central bankers say they have had enough of rapid price rises and insist they are prepared to act to restore price stability, almost at any cost. In Europe, headline rates of inflation have reached similar levels to the US, but core inflation is lower. Bloomberg But after a week of dramatic announcements from central banks around the world, at least some economists are beginning to ask: are they going too far, too fast? The US Federal Reserve has been by far the most important actor in this shift of temperament. Last week, it raised its main interest rate by 0.75 of a percentage point to a range between 3 per cent and 3.25 per cent. At the start of the year, this rate was close to zero. The Fed signalled that this was far from the end of its monetary policy tightening, with members of its interest rate-setting committee predicting rates would end the year between 4.25 and 4.5 per cent – the highest level since the 2008-09 financial crisis. In the summer, Fed chairman Jay Powell talked about higher borrowing costs ending with a “soft landing” for the economy without a recession and a gentle glide down in inflation rates. Last week, he admitted that was unlikely. “We have got to get inflation behind us. I wish there were a painless way to do that,” Mr Powell said. The Fed’s plan to curtail consumer and business spending in a bid to reduce domestic inflation has been replicated elsewhere, even if the causes of high inflation are different. A global issue In Europe, the extraordinary prices of natural gas have sent headline rates of inflation to similar levels as in the US, but core inflation is significantly lower. In emerging economies, declining currency values against the US dollar, which hit a 20-year high this week, have driven import prices higher. The Swedish Riksbank kicked off the copycat action on Tuesday with a 1 percentage point increase in its interest rate to 1.75 per cent, its biggest interest rate rise in three decades. Switzerland, Saudi Arabia and the UAE each announced a 0.75 of a percentage point increase, which for Switzerland meant ending a period of negative rates that started in 2015. The Bank of England on Thursday raised its main rate by 0.5 of a percentage point to 2.25 per cent, the highest since the financial crisis, with a promise of further rate rises to come. Even in Japan, which has long adopted negative interest rates, the authorities felt the need to act to tame inflation. Its finance ministry intervened in currency markets to prop up the yen on Thursday and limit the rise in import prices. It took what it called “decisive action” to address US dollar strength that was pushing the country’s underlying inflation rate to a highly unusual 2.8 per cent rate in August. Economists at Deutsche Bank noted that for every one central bank that was cutting interest rates, 25 other banks were raising them – a ratio that was way above normal levels and has not happened since the late 1990s, when many central banks were given independence to set monetary policy. Nathan Sheets, global head of international economics at Citi and a former US Treasury official, said central banks were “moving so rapidly that as they put these rate hikes in place, there really hasn’t been enough time for them to judge what the feedback effects are on the economy”. Central bankers have been reluctant to admit they made errors in keeping interest rates too low for too long, pointing out that these assessments are much easier to make with the benefit of hindsight than in real time. But they now want to take action to demonstrate that even if they were tardy at the beginning of their fight against inflation, they will be sufficiently “forceful”, to use the Bank of England’s word, to bring it down. Mr Powell was clear that the US central bank would not fail on the job. “We will keep at it until we’re confident the job is done,” he said on Wednesday. Synchronised tightening Sweden’s Riksbank was characteristically blunt in its assessment. “Inflation is too high,” it said. “Monetary policy now needs to be tightened further to bring inflation back to the target.” The new stance on monetary policy has developed through the year, as the inflation problem became more persistent and difficult for central bankers. By the time many gathered at Jackson Hole in August for their premier annual conference, the mood had shifted decisively towards the greater action that was being played out around the world. Christian Keller, head of economics research at Barclays Investment Bank, said that “since Jackson Hole, central bankers have decided that they want to err on the side of hawkishness”. “For the first time in perhaps decades they have become afraid of losing control of the [inflation] process,” said Mr Keller, highlighting how central bankers now say they want to avoid the mistakes of the 1970s. Central banks “are taking decisions that come with much risk and this feels better if everyone else is doing it. The result is a synchronised tightening,” he said. With the new attitude, markets are pricing that by June next year policy rates will rise to 4.6 per cent in the US, 2.9 per cent in the eurozone and 5.3 per cent in the UK; projections that are up to 2 percentage points higher than at the start of August. By raising interest rates, central bankers are not seeking to lower the peak rates of inflation that have been caused outside the US by surging gas and food prices, but they are aiming to ensure inflation does not stick at a rate that is uncomfortably higher than their targets. This could happen if companies and employees begin to expect higher inflation, leading to price rises and demands for higher wages. They are willing to ensure that there is pain in terms of an economic downturn to demonstrate their credibility in hitting their inflation targets. Mr Sheets said that having misread inflation last year, central banks would rather overdo it now. They are balancing the prospects of a recession against the risk of a sustained inflationary episode that would undermine their credibility. “On balance they feel ... that is a risk they have to take.” An added complication is the models that central banks use – which did not foresee such rapid price rises as the pandemic eased and the war in Ukraine began – are no longer working well in describing economic events. Ellie Henderson, economist at Investec, said that “the usual tools and models, which would typically guide such [central bank] analysis, can no longer be relied upon as they are now operating in parameters outside ranges of which they were estimated”. Global recession In this uncharted world, Jennifer McKeown, head of global economics at Capital Economics, thought it was difficult to argue that central banks were going too far. “While this is the most aggressive tightening cycle for many years, it is also true that inflation is higher than it has been for decades,” she says. “Inflation expectations have risen and labour markets are tight, so central banks are rightly concerned about the potential for second-round effects from energy prices to wages and underlying inflation.” But an increasing number of economists, led by some big names such as Maurice Obstfeld, former chief economist of the IMF, think central banks are now being excessive in their actions to raise interest rates and that the effect of all this tightening will be a global recession. The World Bank also expressed similar concerns this week. Antoine Bouvet, an economist at ING, said that “central banks have lost faith in their ability to forecast inflation accurately”, which led them to focus more on today’s actual rates of inflation. “Combine this with the fact that they seem to think that the cost of overshooting in their policy tightening is lower than undershooting, and you have a recipe for over-tightening,” he said. “I would characterise this policy choice as almost overshooting by design.” According to Holger Schmieding, chief economist at investment bank Berenberg, “monetary policy works with a lag, [so] the risk is that the Fed will notice only belatedly that it has gone too far if it now raises rates well beyond 4 per cent”, resulting in unnecessarily long and deep recessions. But as many economists explain, no one really knows what is too far and not far enough in this environment. Central banks therefore want to ensure they eradicate inflation, allowing them to correct course and lower interest rates later if necessary. Krishna Guha, vice chairman at Evercore ISI, said there was a “serious risk” that central banks were overdoing the tightening, but he contended the Fed was right to err in the direction of doing too much. “At the global level, as well as at the US level, it is probably better to overdo it than underdo it and risk a 1970s redux,” Mr Guha said. “But that of course only makes the outcome of overdoing it more likely.”
People here were complaining about the fed blowing market bubbles, and keeping interest rates so low that mom and pop can't live off their savings. Now am I gonna start reading complaints that the fed is crashing the market and interest rates are too high? Based on what I read in ET forums, the fed is like the weather; too much or too little of one thing or another and hardly ever just right.
The Fed is going to go Volcker dude. Why should it have to though, if the USG has no debt? That is the mystery!
Well it's going full volcker because of inflation; not the debt that isn't. We shouldn't expect the fed Chair to know the USG has no debt, he's a lawyer. That debt thing is a secret between you and me.
The ‘real cure’ for inflation has gone ignored, Steve Forbes says Published Mon, Sep 26 2022 Su-Lin Tan@SuLin_Tan https://www.cnbc.com/2022/09/26/the-real-cure-for-inflation-has-gone-ignored-forbes-says.html In focusing on raising interest rates to cool inflation, central banks and governments have overlooked the importance of maintaining stable currencies, said Steve Forbes, chair of Forbes Media. “The real cure is to stabilize the currency. You don’t have to make people poor to conquer inflation,” he said. The British pound briefly fell 4% to an all-time low of $1.0382 on Monday in Asia, following last week’s announcement by the new U.K. government that it would implement tax cuts and investment incentives to boost growth. The British pound plunged to a record low on Monday morning in Asia, following last week’s announcement by the new U.K. government that it would implement tax cuts and investment incentives to boost growth. In focusing on raising interest rates to cool inflation, central banks and governments have overlooked the importance of maintaining stable currencies, said Steve Forbes, chair of Forbes Media. The British pound briefly fell 4% to an all-time low of $1.0382 on Monday in Asia, following last week’s announcement by the new U.K. government that it would implement tax cuts and investment incentives to boost growth. Currencies are weakening against the U.S. dollar as interest rates in the United States continue to rise. Both the Chinese yuan and Japanese yen also fell heavily as the two economies maintain more accommodative monetary policies than the United States. “No central banker today — hardly any — talks about stable currencies. It’s about depressing the economy to fight inflation,” Forbes said at the Forbes Global CEO Conference in Singapore on Monday. He said many economists and policymakers have stuck to a standard “dogma” or mindset of targeting inflation by hiking interest rates and failed to look beyond that, such as by taking steps to shore up currencies. ‘The real cure’ Forbes cited favorably an example from the 1980s: After then Fed chair Paul Volcker reined in inflation with a dramatic interest rate hike of over 20%, U.S. President Ronald Reagan stabilized the economy and increased production by cutting taxes and introducing deregulation. The Reagan administration also coordinated global efforts to sell dollars and buy up other currencies. “Today, unfortunately, not only is the Biden administration putting up obstacles to deal with supply-side problems, but also the Federal Reserve and other central banks think you have to depress the economy to bring inflation,” he said disputing the idea that a recession is the only solution to combating inflation. “They do it by artificially raising interest rates. So they have fewer people employed ... that is not the real cure.” “The real cure is to stabilize the currency. You don’t have to make people poor to conquer inflation.” Currency imbalances can create problems for economies. A higher U.S. dollar means more expensive exports, while weaker currencies could mean problems like lower foreign exchange reserves. Forbes suggested using gold to stabilize currencies — for example, tying the U.S. dollar to gold so the dollar has a fixed value. “Gold holds its intrinsic value better than anything else on earth … gold is not perfect as a stable value but it is better than anything we have found in over 4000 years,” he said. “With unstable currencies you get less productive long-term investments, which is key to economic growth.” Forbes said that after the Bretton Woods gold standard was introduced in the 1940s — under which the U.S. dollar was fixed to gold and other currencies were fixed to the dollar — economic growth rates were a lot higher. However, the Bretton Woods system collapsed in the 1970s. Separately, HSBC’s global chief economist Janet Henry said at a panel at the same conference that she would not be surprised if the sterling continued to fall below the low of $1.0382 on Monday, but she did not expect it to stay at those levels. “I don’t think there will be currency intervention on the sterling … but the onus is now on the central bank to do more to tighten policies to stabilize the situation,” Henry said. “I think unless we get severe financial distress they [bank] will wait until the next meeting to show decisive action to raise rates aggressively in the next couple of meetings.”
US dollar’s surge should force Fed ‘to pivot’: Cathie Wood Timothy Moore Before the Bell editor Sep 27, 2022 https://www.afr.com/markets/currenc...orce-fed-to-pivot-cathie-wood-20220927-p5bl8r The US central bank has adopted a “sledgehammer” in its effort to combat inflation and the potential cost Cathie Wood said the US Federal Reserve’s decision to lift interest rates to quell persistent inflation was out of proportion and the effect of the US dollar’s subsequent surge should force the Fed to pivot. In a series of tweets, Ms Wood said the yield curve “suggests” that US monetary policy had not been this restrictive since the 1980s. At the close of trading in New York overnight, the 10-year US government note yield was 3.92 per cent and the two-year yield was 4.34 per cent – a gap of 0.42 of a percentage point. “Under [former Fed boss Paul] Volcker, the increase in long Treasury yields was 1.6 times, from 10 per cent to 16 per cent, compared to 7.4 times, from 0.5 per cent to 3.7 per cent under [Jerome] Powell and team,” Ms Wood said. “Risk aversion is pummelling all assets except cash, but the Fed seems fixated on hiking rates another 100 basis points to protect its legacy.” Ms Wood said the inflation surge in the late ’70s and early ’80s had been brewing for 15 years, starting with the Vietnam War and “The Great Society” social programs in 1964, and exacerbated by the end of the gold-exchange standard in 1971. “By the time this Fed tackled the current surge, inflation had been brewing for about 15 months, not 15 years. Now, it is ‘keeping at it’ with a sledgehammer 13 times more powerful than the one Volcker wielded in the ’80s.” Ms Wood then pointed to US dollar sales last week by Japan and China to protect their respective currencies “against a parabolic dollar that is causing significant harm to the global economy”. “In other words, they are starting to ‘ease’ dollar-based monetary policy by putting more dollars into the system. “Japan’s and China’s dollar sales could be the first sign that ‘monetary easing’ is on the way. The dollar’s parabolic move has been devastating to the rest of the world and should come back to bite US competitiveness, jobs, and ... economic activity, forcing the Fed to pivot.”
inflation rate at the consumer level has moved up years ahead of the core CPI, but central bank ignored it; they waited until the last minute to react to the problem.
......Powell's expansion of credit through repo contracts, seen as a new "Greenspan put,"[51][72] created large profits for Wall Street investment banks.[74] In June 2020, Jim Grant likened Powell's policy to drug dealing, calling him "the Fed's Dr. Feelgood."[74][75] In a September 2020 testimony, Powell said: "Our actions were in no way an attempt to relieve pain on Wall Street".[76] By the end of 2020, Wall Street investment banks recorded their best year in history,[77][78] and Bloomberg called 2020, ".. a great year for Wall Street, but a bear market for Humans".[79] Mohamed A. El-Erian called Powell "a follower, not a leader" of markets.[10]...... Wiki
‘Crisis’ is coming for the stronger US dollar The US dollar strength has triggered extraordinary outflows from sharemarkets in Asia and will provide headwinds to earnings in the United States. Updated Sep 27, 2022 https://www.afr.com/chanticleer/crisis-is-coming-for-the-stronger-us-dollar-20220927-p5blak The strongest United States dollar in about 35 years will head higher over the next few months in tandem with the US Federal Reserve tightening, according to leading strategists. A strong dollar is another bearish factor feeding into the earnings downgrades for US equities by respected Morgan Stanley chief investment officer and strategist, Mike Wilson. Morgan Stanley chief investment officer Mike Wilson says the strong US dollar is another reason for further hits to US earnings. David Rowe Wilson has been bearish all year and is now predicting the S&P 500 will fall to a range of around 3000 to 3400. He says in a note to clients the likely rise in the US dollar index (DXY) to 118 by the end of the year will add a 10 per cent headwind to S&P 500 earnings in the fourth quarter given the correlation between a stronger dollar and lower earnings. The DXY is up 21 per cent this year to 113.73. Morgan Stanley calculates that every 1 per cent change in the DXY has a negative 0.5 per cent impact on S&P 500 earnings. “The recent move in the US dollar creates an untenable situation for risk assets that historically has ended in a financial or economic crisis, or both,” Wilson says. “While hard to predict such ‘events’, the conditions are in place for one, which would help accelerate the end to this bear market.” Wilson says US companies derive about 30 per cent of sales outside the US, and that number exceeds 50 per cent for the tech sector. A year-on-year change in the trade-weighted US dollar is negatively correlated to earnings revisions over time. Most vulnerable sectors The sectors most vulnerable to hits from dollar strength are capital goods, software, media and entertainment, materials, energy and tech hardware. Ben Inker, co-head of asset allocation at GMO, says in a note that while an overvalued currency is a negative influence on the performance of equities in that country, the opposite is also true. “By contrast, a cheap currency is a strong equity tailwind in the developed world, leaving developed markets like the euro area and Japan poised to benefit from their undervalued currencies,” he says. “To date, the effects of the expensive dollar have not been that noticeable for the US, but the impact has been quickly felt in other countries. The strong dollar and high commodity prices have pushed some less developed countries into distress. “Still, the valuation of currencies in the emerging world today are attractive enough that even allowing for some poor decision-making [by governments], they should still be a source of equity market support over the next few years.” Severe short-term pain But the promised reversal of the US equity dominance of the last decade is not going to happen without severe pain in the short term. The following countries in the MSCI World Index have experienced equity market declines this year, in US dollars, as follows: Korea 38 per cent, Taiwan 36 per cent, China-A 33 per cent, Japan 25 per cent, Philippines 22 per cent, Singapore 21 per cent, and Australia 20 per cent. There has been and will continue to be persistent capital outflows from the region driven by higher US term structure, supply side constraints, and latent concerns regarding China’s COVID-zero strategy, according to Exante Data. A note from its analysts this week says Exante Data’s outperformance measure is the highest since March 2020. Also, the firm says many of the potential sources of two-way risk for the US dollar have already materialised, so it is hard to see a bearish turn in the dollar amid increasingly “crisis-like” dynamics in G10 foreign exchange markets. “The key to a dollar turn will be a bottoming in global growth expectations and sustained slowing of US inflation,” the analysts say. Renny Ellis, CEO of fixed interest manager, GCI Australia, says the rise in the US dollar means that the Federal Reserve will not need to keep raising rates because the strong dollar is likely to slow US economic activity and reduce inflationary pressures much faster than the market expects. Meghan Swiber, from Bank of America Global Research, says the dollar is surging on the back of the largest year-to-date move in short-term US rates over the past 40 years. “The second-largest was in 1981 when the Fed was similarly trying to get inflation under control,” she says. Swiber says further tightening in financial conditions and a turn in the labour market will be required before the Fed stops tightening, which suggests the Fed will overtighten. Oppenheimer Asset Management’s chief investment strategist, John Stoltzfus, says foreign purchases of US assets by investors seeking “safe havens” amid the war in Ukraine and expectations of higher rates from the central bank, have helped push the US currency higher for most of this year. Fundstrat’s Mark Newton, who is head of technical strategy, says the DXY is in its largest overbought condition on a monthly basis since 2015 and before that, 1985. “While a small sample size, both of those prior occasions resulted in meaningful underperformance in the years to come,” he says. “Overall, it’s unlikely the US dollar runs higher through Q4. I expect a good reversal that should start some time in October.”