Global central banks begin to change their policies as inflation declines.
Global central banks begin to change their policies as inflation declines.
The Federal Reserve’s benchmark overnight interest rate is now in the 5.25%-5.50% range.
Despite declining inflation, top central banks continued to raise interest rates this week, but have suddenly become more cautious about additional rises, indicating that a year-long round of global monetary tightening may be coming to an end.
The US Federal Reserve and the European Central Bank raised interest rates by quarter-points this week, as expected, and left the door open to more increases if inflation did not continue its decrease, which has begun to accelerate on both sides of the Atlantic.
Meanwhile, the Bank of Japan announced intentions to stop its ultra-easy monetary policy on Friday. It has remained a dovish outlier by maintaining interest rates ultra-low, but it stunned markets on Friday by altering its yield control strategy and allowing long-term borrowing costs to increase further, reflecting the likelihood of growing inflation.
However, this has now been combined with a broader perspective of how prices are evolving in tandem with the economy as a whole, a more comprehensive approach that might allow slower job and economic growth to serve as evidence that inflation will continue to fall.
This is a departure from policymakers’ insistence over the past year that they needed to see actual decreases in the rate of price rises to know they were making progress, and it could inject what Fed Chair Jerome Powell described as “patience” into the debate over whether more rate hikes are needed.
The Fed’s benchmark overnight interest rate is now between 5.25 to 5.50 percent, while the ECB’s primary rate is 3.75 percent.
“Given how far we’ve come, we can afford to be a little patient as well as resolute as we let this unfold,” Powell said during a news conference on Wednesday following the Fed’s decision to raise rates for the 11th time in the last 12 meetings
“We want to see moderate or modest economic growth to help alleviate inflationary pressures.” We want to see sustained restoration of supply and demand equilibrium, notably in the labor market… “We can see the puzzle pieces coming together.”
Open mind
President Christine Lagarde of the European Central Bank said a minor wording change in the central bank’s latest policy statement was “not just random or irrelevant,” but meant to communicate that after nine straight rate increases, a pause would be on the table at the central bank’s September meeting, just as it will be for the US central bank.
On Thursday, new US GDP statistics revealed that the path to a global halt is far from apparent in an economy that continues to baffle.
In the second quarter, the economy grew at a faster-than-expected 2.4 percent annual rate, substantially above the 1.8 percent annual rate that Fed officials regard as the approximate trend compatible with their 2% inflation target. Nonetheless, quarterly inflation statistics came in lower than predicted.
While bond markets reacted to better growth by raising Treasury yields, the days of coordinated global tightening may be numbered.
Though there was “material risk” that inflation would necessitate additional raises, Evercore ISI Vice Chairman Krishna Guha said that “in the base case, the ECB – like the Fed – is done raising rates.”
