The primary and unconditional responsibility of a central bank is to ensure price stability. Jerome Powell returned to basics on Friday in Jackson Hole at the annual meeting of central bankers in Wyoming, organized by the Kansas Fed. His observation was unanimous among his colleagues (England, Switzerland, Europe, Korea, etc.), with the exception of Japan.
Some of them took advantage of this event of planetary dimensions, closely followed by the markets, to communicate their desire to fight against the rise in prices, a global and destabilizing phenomenon. By acting in concert, central banks are more effective in this fight. The only dissenting voice, Haruhiko Kuroda, Governor of the Bank of Japan, said that “we have no choice but to continue monetary easing until wages and prices increase in a stable and sustainable way. “. His country is facing a much more moderate price increase, 3% this year, and 1.5% in 2023 according to him.
Sacrifice, sweat and tears
Central banks must act with “determination” to fight inflation, “even at the risk of weaker growth and higher unemployment”, Isabel Schnabel, member of the executive board of the European Central Bank (ECB) said on Saturday. ) at the Jackson Hole meeting. She used the strong term “sacrifice”, very unusual in ECB speeches and with Churchillian accents. Activity will take a back seat to the fight against rising prices, the mandate of the central bank.
Banque de France Governor François Villeroy de Galhau stressed that “we must not be slow and delay normalization until higher inflation expectations force us into aggressive rate hikes”, said he explained. The ECB could raise its key rates by 75 basis points (instead of the 50 expected by the markets) on 8 September. It is in any case the wish of certain members of the Board of Governors, according to confidences collected by Archyde.com. A stronger than expected monetary tightening could cause the euro (0.9965 dollar) to rise above parity but could curb European stock markets.
Paris (-1.68%), Frankfurt (-2.26%) and Wall Street have also reacted badly to the hard line adopted by the boss of the Fed. On Friday, the Dow Jones lost 3.03%, its worst performance in three months. The Nasdaq, the technology stock market, fell 3.94%.
“We are taking strong and rapid action to moderate demand so that it aligns with supply and to contain inflation. We will continue until we are sure we have done our job,” the Fed Chairman professed. He also pointed to the danger of a “premature easing” of monetary policy despite the continued slowdown in the economy. Household consumption almost stagnated in July, at 0.1% after 1% in June, the Commerce Department announced on Friday. Household incomes also rose only 0.2%, compared to 0.7% in June. And for once, prices did not rise in July but thanks to the 7.7% drop in gasoline.
The error of 2021
Following this speech, Cleveland Fed boss Loretta Mester told Bloomberg that she envisaged rates for the beginning of 2023 “slightly above 4%”, to “probably be maintained at this level next year “. On CNBC, the president of the Atlanta Fed, Raphael Bostic, meanwhile, placed the “restrictive” rate cursor between 3.5% and 3.75%. The Fed funds rate level is currently between 2.25% and 2.5%.
Jerome Powell’s tough stance was expected, after the strategic mistake of 2021. Last year, the Fed Chairman downplayed inflation risks. He thought that it would be absorbed at the same time as the disorder of the distribution circuits linked to the Covid crisis. The rise in prices then reached the rate of 5%. But things didn’t go as planned. Inflation rose to 9.1% in June, before falling back to 8.5%.
Jerome Powell warned of the risk of letting inflation take hold. After the oil shock of 1979, “the higher inflation grew, the more people expected it to remain high, transforming this belief into wage and price decisions.” He quoted Paul Volcker, the boss of the Fed between 1979 and 1987 who had raised rates to 20% in 1980. “Inflation partly feeds on itself, so part of our job to return to a more stable and productive economy must be to break the stranglehold of inflationary expectations.”