Jay Powell has finally said what a lot of economists were thinking – US rate rises are some way off, but that shouldn’t deter the ECB and Bank of England.
- Fed chair Jay Powell that the fight against inflation would take “longer than expected”
- The IMF’s World Economic Outlook said US growth is likely to be 2.7% in 2024
- The market odds are now on an initial interest rate rise in September
Markets were unsurprisingly grumpy about comments from Fed chair Jay Powell that the fight against inflation would take “longer than expected”. Global stock markets saw steep declines as it became clear that the Federal Reserve would cut rates less than expected in 2024, if at all. With hindsight, this should have been obvious.
It was always unlikely that the US economy would see continued growth as well as interest rate cuts, Rather, it would see one or the other. Powell’s comments come on the same day that the IMF’s World Economic Outlook said the US economy was on track to grow at double the rate of any other G7 country this year. It said US growth is likely to be 2.7% in 2024. The problem for President Biden and his re-election prospects is that this is below the current level of core inflation, which is running at 2.8%.
The market odds are now on an initial interest rate rise in September, but a growing minority believe there will be no cuts at all this year. There has been a significant shift for bond markets since the start of the year. 10 year treasury yields have risen from below 4% to their current level of 4.7%. It fits a narrative that a number of economists had built, with inflation running persistently hotter, and interest rates staying at more normalised levels of 4-5%.
Nevertheless, this does not need to derail UK or European policymakers, who face a different set of circumstances. The same IMF report showed that Germany’s expansion would be just 0.2% over 2024, with Italy and France at just 0.7%. The UK’s forecast was revised lower once again, down to 0.5%.
European central bank governor Christine Lagarde appears to recognise this. She said the ECB was ‘observing a disinflationary process’ across Europe and barring a major shock, would be cutting rates in short order. She remains confident that Eurozone inflation will reach 2%, even if the path is bumpy. The Eurozone bond markets did not react significantly to the news.
The Bank of England, however, continues to vacillate, in spite of the weakness of the UK economy. UK gilt yields have risen in line with US bond yields, presumably on the assumption that the UK will continue to track the US. The Bank of England may have to take prompt action if it is to avoid tracking the monetary policy of the US and damaging the UK’s growth prospects.
