Live: Jerome Powell says risks of undertightening persist at ECB forum speech
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Central bank bosses to discuss monetary policy collectively in ECB forum.
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Divergence on recent monetary policy between Fed, ECB, BoE and BoJ makes the event particularly interesting.
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Jerome Powell vocabulary will be particularly scrutinized ahead of expected rate hike in July.
Jerome Powell, Chairman of the Federal Reserve System (Fed) and Christine Lagarde, European Central Bank (ECB) President, are speaking at the 2023 ECB Forum on Central Banking. Alongside Powell and Lagarde, Bank of England Governor (BoE) Andrew Bailey and Bank of Japan (BoJ) Governor Kazuo Ueda are also taking part at the same panel, with the market focused on identifying future paths for the interest rate trajectory, checking if rate decisions will synchronize or diverge in the coming months.
The Fed left its policy rate unchanged at the range of 5%-5.25% following the June policy meeting but left the door wide open for a return to a 25 basis points (bps) rate hike in July. The ECB raised key rates by 25 bps in June and Lagarde noted that it is very likely the case that the ECB will continue to hike rates in July. In an unexpected decision, the BoE lifted its policy rate by 50 bps to 5% in response to strong wage inflation and Consumer Price Index (CPI) figures recorded in May. Finally, the BoJ maintained its loose policy settings in June but experts think the BoJ could review its Yield Curve Control strategy as early as next month for a possible tweak later this year.
Powell: Watching commercial real estate very carefully
These are the main takeaways from ECB forum Q&A sessions in Sintra:
Bailey: “It would not be the right thing to do to change the inflation target.”
Bailey: “Market doesn’t think we are not nearly done at the moment.”
Powell: “US economy is quite resilient and latest data are consistent with that.”
Powell: “Inflation proved to be more persistent than expected.”
Powell: “Watching commercial real estate very carefully.”
Powell: “Commercial real estate worries played no part in June decision.”
Powell: “We don’t target particular parts of the market.”
Lagarde: “Transmission of policy is likely to be less rapid than in the past due to fixed rate mortgages.”
Lagarde: “We may have underestimated the resilience of our economies.”
Ueda: “We’re seeing signs of inflation expectations rising but they not fully in line with the inflation target.”
Powell: Economic downturn not the most likely case
Ueda: “Still some distance to go in sustainably achieving 2% inflation accompanied by sufficient wage growth.”
Ueda: “Economy is going to expand slightly above potential for some time.”
Bailey: “Brexit is not part of a strong labor market story.”
Lagarde: “We are not seeing enough tangible evidence of falling underlying inflation.”
Lagarde: “Second quarter was not great for manufacturing.”
“Lagarde: “Manufacturing does not give great hope for a strong recovery.”
Powell: “There is significant disinflation in pipeline from rents but it will take time.”
Powell: “We need to see more softening in labour market.”
Powell: “We’re getting the softening we need but slower than expected.”
Powell: “Significant probability is we get a downturn but it’s not the most likely case.”
Powell: We believe there’s more restriction coming, driven by labor market
Lagarde: “We still have ground to cover.”
Lagarde: “If the baseline stands, we know we will likely hike again in July.”
Bailey: “UK economy turned out to be much more resilient.”
Bailey: “Data showed clear signs of persistence of inflation.”
Bailey: “We will do that is necessary to get inflation to target.”
Powell: “Policy hasn’t been restrictive for very long.”
Powell: “We believe there’s more restriction coming, driven by labor market.”
Powell: “Strong majority for two more rate hikes in dot plot.”
Powell: “As you get closer to target, you’re closer to a place where risks become more in balance.”
Powell: “Wouldn’t take moving at consecutive meetings off the table.”
About Jerome Powell (via Federalreserve.gov)
“Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028.”
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.