Alignment between the United States and the European Union. The presidents of the central banks, Jerome Powell (Fed) and Christine Lagarde (ECB), stated yesterday at the Jackson Hole symposium that the battle against inflation is not over.
Both agreed on the recipe. Despite the repeated increases in interest rates, you must be ready to continue on this route and maintain a restrictive monetary policy.
After explaining the changes caused by the pandemic, Lagarde emphasized that we have entered a new era in which the regulations of the past can be broken.
“In the current environment, for the ECB this means setting interest rates at sufficiently restrictive levels for as long as necessary to achieve a return of inflation to our medium-term objective of 2%”, said the president of the European Central Bank.
His speech closed a day that Powell opened, with a prescription of the situation in which there was coincidence.
The US economy is facing uncertainties, according to the chairman of the Federal Reserve. If too little is done, there is a danger that inflation will spiral and a tougher monetary policy will be required. If it tightens excessively, it can cause excessive damage to the economy.
It’s the Hamletian dilemma. Powell raised this at the meeting in Wyoming, where he acted as a hawk to indicate that, despite the advances after eleven increases in interest rates in 18 months – up to 5.25-5.50%, the maximum in 22 years – the task is not finished. The solid growth of the economy entails persevering in containment.
“Although inflation has fallen from the peak it climbed to, a welcome development, it is still very high,” he said. “We are prepared to raise rates further if necessary and we intend to keep policy in a restrictive range until we have confidence that inflation is coming down sustainably to the new target,” he warned.
The goal of US central bank governors, like that of the ECB, is 2%. Inflation has fallen from 9.1% in June 2022, a record in half a century, to 3.2%. The matter is complicated by core inflation, which excludes the most volatile elements such as energy and food prices, because it remains very high, at 4.7%. His pronouncement, as if in need of costly digestion, sent the Dow Jones into negative numbers and then back into gain territory.
Powell promised that the Federal Reserve “will proceed carefully in deciding whether to tighten further or, instead, maintain a constant rate policy pending new data.”
One of the questions on the table was to find clues as to whether the Fed will loosen monetary policy and therefore watch for possible cuts on the horizon. That this will happen next year is not ruled out, but Powell was aggressive.
“Additional evidence of persistently above-trend (economic) growth could drive further advances in inflation risk and could justify further tightening of monetary policy,” he warned. “There is still a lot of ground to cover to return to price stability”, he insisted.
He noted the progress with respect to his appearance at this forum in 2022. However, Powell reiterated that this year, as in the past, “the message is the same”. “The Fed’s job is to bring inflation down to 2%,” he said. “We must act with caution based on the risks.” He did not reveal whether there will be another rate hike at the Fed’s next meeting in September. He hinted that an increase is planned throughout 2023.
In his words, he evidenced that the United States economy has been much more resilient than they expected, with a labor market still very strong, even if there is not so much job supply, while consumption is not lose strength “We are attentive to the signs that show that the economy is not cooling down as we expected”, he acknowledged.
“There is always uncertainty about the precise level of monetary policy restriction. But this uncertainty highlights the need for an agile political formulation”, he added.
Many economists have postponed or canceled the omen that this monetary policy would lead to a recession. Optimism about a “soft landing” has grown.
