Further evidence has been forthcoming this week that central banks continue to hold the prospect of rising inflation as a marker for increasing interest rates.
Outgoing New York Fed Chairman William Dudley, who back in January remarked how the current fiscal path in the U.S. was ‘unsustainable‘ and warned of a future economic downturn, spoke to CNBC on Monday about how many rate rises markets can expect in 2018. At present economists are generally expecting a minimum of three hikes and a maximum of four. Dudley, however, cautioned that this might be an underestimation, primarily due to inflation:
- As long as inflation is relatively low, the Fed is going to be gradual. Now, if inflation were to go above 2 percent by an appreciable margin, then I think the gradual path might have to be altered.
- The market understands that more than four is quite unlikely, because that would no longer be a gradual path of monetary policy tightening. It would also imply that the Fed was going to tighten by 50 basis points at a press conference meeting or go meeting to meeting.
The connection between the Fed adapting monetary policy in line with press conferences is something I raised in an economic update in December 2017. As central banks have gradually been reining in record low interest rates, they have very deliberately been using speeches and televised interviews / conferences as a vehicle to keep market participants on side. Indeed, Bundesbank chairman Jens Weidmann admitted recently that central bank communication had become ‘a monetary policy tool in itself.’
Dudley has left open the possibility that the Fed may become more aggressive in raising rates than people are anticipating. And if higher inflation was to be a reason for that, what might be the cause?
- “If trade barriers go up, it’s bad for the U.S. economy. You’re going to have more inflation, less growth, lower productivity, just bad, bad outcomes.”
Only last week IMF head Christine Lagarde warned that the global trade system was at risk of being ‘torn apart‘ by protectionist measures. This has been followed up by the IMF’s economic counsellor, Maurice Obstfeld, who on Tuesday said:
- The first shots in a potential trade war have now been fired. The multilateral rules-based trade system that evolved after world war two and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart.
When the U.S. implement tariffs on China in a few weeks time (which the Chinese have already said they will retaliate against), everything will be in place for the much touted ‘Trade War‘ between East and West. As I have said before, central banks are telegraphing a notable rise in inflation, and their communications all point to interest rates rising as a result.
Meanwhile, French President Emmanuel Macron has been speaking about how political division in Europe is akin to a ‘civil war‘. Macron is pushing for structural reforms to the EU and in January stated that 2018 was a year to ‘redesign a ten-year strategy for Europe‘. So far, the impression is that Macron is being frustrated in his attempts at gaining a consensus on reforms before next year’s European parliamentary elections.
- There seems to be a certain European civil war: national selfishness and negativity seems to take precedence over what brings us together. There is a fascination with the illiberal, and that is growing all the time.
- The deadly tendency which might lead our continent to the abyss, nationalism, giving up of freedom: I reject the idea that European democracy is condemned to impotence.
The nationalist / protectionist narratives began prior to the EU referendum in 2016 and have grown in stature since Donald Trump’s election and the rise of ‘populist‘ parties in Europe. These narratives have been playing out directly alongside the changing stance of monetary policy, and have acted as a more than adequate distraction from the behaviour of central banks. This will only continue as the protectionist fervour gathers pace with nationalism presented as a root cause for economic decline.
As long as central banks have the luxury of these strawmen to conceal the intent of their actions, there is next to no prospect of them being held accountable.
- San Francisco Federal Reserve Bank President John Williams on Tuesday said he expects U.S. inflation to rise to the U.S. central bank’s 2-percent goal this year and stay at or above that goal for “another couple of years.”
- To keep the economy from overheating, he said at Banco de España in Madrid, the Fed needs to keep raising interest rates.
- “We have to be vigilant to make sure we’re not overstimulating the economy and generating either wage and price increases that are faster than what we’re going to want in the long run, or financial stability concerns.”
- “At some point you have to get the unemployment rate back to the sustainable rate,” he said. “That would imply a tighter policy than what you think is necessary to keep inflation and the unemployment rate level.”
CNBC: Fed’s Kashkari – We’re not going to keep interest rates low to help the government run up debt
- Minneapolis Fed President Neel Kashkari said Thursday that national debt concerns are not a factor the central bank weighs when deciding rate levels.
- “How the Treasury funds itself and how much they spend and what they spend on is not part of our deliberations,” he said. “We’re not going to keep interest rates low to make Treasury’s job easy.”
“I expect somewhat more tightening may end up being needed than is currently reflected in the projected median for the federal funds rate,” said Boston Fed President Eric Rosengren this Friday.
British workers’ pay is still rising by less than inflation despite the lowest unemployment rate since 1975, official data showed on Tuesday, but weaker-than-expected wage growth is unlikely to stop interest rates rising next month.
Tuesday’s data showed average weekly earnings in the three months to February were 2.8 percent higher than a year earlier – unchanged from January’s rate, a two-and-a-half-year high, but below economists’ forecasts of a pick-up to 3 percent.
- According to the latest Monthly Treasury Statement, in March, the US collected $210.8BN in receipts – consisting of $88BN in individual income tax, $98BN in social security and payroll tax, $5BN in corporate tax and $20BN in other taxes and duties- a drop of 2.7% from the $216.6BN collected last March and a clear reversal from the recent increasing trend…
- Interest on Debt: $33BN.
- Germany is proving less keen than the European Commission had hoped to share its wealth with poorer EU states. That reluctance is likely to push back deadlines for proposals on eurozone reform. It could even sink the commission’s ideas on deeper monetary union, solidifying Europe’s north-south economic divide.
- “We are so far apart that hardly any results can be achieved at the EU summit in June,” Ralph Brinkhaus, the deputy head of chancellor Angela Merkel’s centre-right CDU/CSU bloc told press in Berlin on Thursday (12 April).
- The Rockefellers have reportedly joined the crypto party. Venrock, the official venture-capital arm of the family, reportedly signed a partnership with Coinfund, a cryptocurrency investment fund, to back virtual tokens and blockchain business innovations.
- The Rothschilds, also known for their close ties to banks and other financial institutions, have stepped towards cryptocurrency trading as well. In December, the family reportedly purchased bitcoin exposure via the Grayscale Bitcoin Trust for the first time.
- Mark Carney said the automation of millions of jobs could lead to mass unemployment, wage stagnation and the growth of communism within a generation.
- He warned “Marx and Engels may again become relevant.”
- “If you substitute platforms for textile mills, machine learning for steam engines, Twitter for the telegraph, you have exactly the same dynamics as existed 150 years ago – when Karl Marx was scribbling the Communist Manifesto.”