Aurelia Butler

JACKSON HOLE, Wyo. (Reuters) -Central banks around the world risk losing public trust and must now act forcefully to combat inflation, even if that drags their economies into a recession, European Central Bank board member Isabel Schnabel said on Saturday.Inflation is close to double-digit territory in many of the world’s top economies and any decline is likely to be slow, keeping prices above central bank targets for years to come.”Even if we enter a recession, we have little choice but to continue the normalization path,” Schnabel told the U.S. Federal Reserve’s Jackson Hole Economic Symposium. “If there was a de-anchoring of inflation expectations, the effect on the economy would be even worse.”She also cautioned central banks against pausing on the first sign of a potential turn in inflationary pressures. Policymakers should instead signal their “strong determination” to bring inflation back to target quickly, she said.”If the public expects central banks to lower their guard in the face of risks to economic growth – that is, if they abandon their fight against inflation prematurely – then we risk seeing a much sharper correction down the road,” Schnabel added.She argued that the risk is rising that longer-term inflation expectations move above the bank’s target, or “de-anchor,” and surveys now suggest that inflation is denting public trust in central banks.”Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high,” Schnabel said. “In this environment, central banks need to act forcefully.” More

JACKSON HOLE, Wyo. (Reuters) – European Central Bank policymakers made the case on Saturday for a large interest rate hike next month as inflation remains uncomfortably high and the public may be losing trust in the bank’s inflation-fighting credentials.The ECB raised rates by 50 basis points to zero last month and a similar or even bigger move is now expected on Sept 8, partly on sky-high inflation and partly because the U.S. Federal Reserve is also moving in exceptionally large steps. Speaking at Fed’s annual Jackson Hole Economic Symposium, ECB board member Isabel Schnabel, French Central Bank chief Francois Villeroy de Galhau and Latvian central bank Governor Martins Kazaks all argued for forceful or significant policy action.”Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high,” Schnabel said. “In this environment, central banks need to act forcefully.”Markets were betting on a 50 basis point move on Sept 8 until just days ago but a host of policymakers, speaking on and off record, now argue that a 75 basis point move should also be considered.”Frontloading rate hikes is a reasonable policy choice,” Kazaks, told Reuters. “We should be open to discussing both 50 and 75 basis points as possible moves. From the current perspective, it should at least be 50.”Rate hikes should then continue, the policymakers argued.With rates at zero, the ECB is stimulating the economy and remains far from the neutral rate, which is estimated by economists to be around 1.5%.Villeroy said that the neutral rate should be reached before the end of the year while Kazaks said he would get there in the first quarter of next year.”In my view, we could be there before the end of the year, after another significant step in September,” Villeroy said. Schnabel also warned that inflation expectations were now at risk of moving above the ECB’s 2% medium term target, or “de-anchor” and surveys suggested that the public has started to lose trust in central banks.The rate hikes come even as the euro zone growth slows and the risk of a recession looms. But the recession will be mostly due to soaring energy costs, against which monetary is powerless. The downturn is also unlikely to weigh on price growth enough bring inflation back to target without policy tightening, many argue.The looming downturn is an argument to frontload rate hikes as it becomes difficult to communicate policy tightening when the slowdown is already visible. “With this high inflation, avoiding a recession will be difficult, the risk is substantial and a technical recession is very likely,” Kazaks said. More

JACKSON HOLE, Wyo. (Reuters) – Cleveland Federal Reserve Bank President Loretta Mester on Saturday said she would base her decision on whether to back a third straight 75-basis point interest rate hike next month on U.S. inflation data, not the closely-watched jobs report.Fed Chair Jerome Powell on Friday said the Fed will raise borrowing costs high enough to start biting into growth, soften the labor market and bring down inflation, but said the size of September’s rate hike would depend on the “totality” of the data before then. [L1N30219A] The U.S. Labor Department releases its estimate for September job gains next Friday, and for the consumer price index a week before the Fed’s Sept. 20-21 meeting. The University of Michigan will publish its closely-watched inflation expectations data on Sept. 16.”I don’t have a lean at this point,” Mester told Reuters on the sidelines of the annual central bankers’ conference in Jackson Hole, Wyoming, adding data on inflation and the inflation outlook will guide her calculus. “We haven’t really seen, to my satisfaction, convincing evidence that inflation is on a downward path – I’m not even convinced it’s peaked yet.” Mester also said she envisions raising the U.S. central bank’s policy rate to a little above 4% by early next year and then holding it there for all of 2023. The Fed currently targets its policy rate in the 2.25%-2.5% range.”I don’t see the fed funds rate moving back down next year,” she said. That’s contrary to market expectations for a small decrease, presumably in response to a weakening economy or a decline in inflation. With the labor market very tight, Mester said she is not expecting a recession. She also does not expect the unemployment rate, now at 3.5%, to rise to more than 4.25%, much less to the 5%-6% that some analysts have said might be required to really cool inflation that, by the Fed’s preferred measure, rose 6.3% in July. That measure, the personal consumption expenditures price index, was down from June’s 6.8%, but has been running at above the Fed’s 2% target since March 2021.Mester’s remarks underscore the complete unity among Fed policymakers on the need to raise rates further to beat inflation, regardless of the hit to households as the jobless rate rises. But they suggest there is room for debate over how far they need to go. Atlanta Fed President Raphael Bostic on Friday for instance said he sees a need for another 100 to 125 basis points of increases, which would bring the target rate to somewhere between 3.25%-3.75%.While rising unemployment will hurt households, things would be worse if the Fed doesn’t act, Mester said, echoing Powell’s remarks on Friday. “Inflation right now is causing pain ,” Mester said. “Right now inflation is still very high, it’s unacceptably high, and it’s just going to take more action on the part of the Fed to get it on that downward trajectory.” More

The writer is chief executive of the Resolution Foundation think-tankEconomic crises have phases you can almost feel. They ebb and they flow, as the nature and scale of the crisis, and our awareness of it, changes. Single events often crystallise a shift, forcing policymakers to wake up to the fact they are required to act in ways that seemed unimaginable just weeks before. The run on Northern Rock in 2007 forced the traumatised Treasury I was then working in to guarantee savers’ deposits, while initially ruling out nationalisation and insisting this was an isolated case. A year later, the collapse of Lehman Brothers brought home the reality: the global financial system was on the brink and it was time to nationalise institutions at the commanding heights of British banking.For the UK’s current cost of living crisis, the Northern Rock moment was April’s 50 per cent increase in typical energy bills to £1,971. The government allowed prices to rise, while eventually offering households £30bn of support to pay surging bills. But the latest announcement from Ofgem that energy bills are heading to £3,549 this October, on the way to more than £5,000 in January, was the Lehman Brothers moment of this crisis. It tells us that we are entering a new world where policies that were previously seen as unthinkable are now all but inevitable. Prices will be heading higher just as temperatures plummet and families turn on the heating: the UK uses 80 per cent of domestic gas between October and March. Energy bills are on track to be three times higher this winter than last, at £500 a month.Worst affected will be the UK’s 4mn customers on prepayment meters, who cannot spread the higher winter costs out over the year. They will be asked to find more than £700 in January alone — over half of their typical disposable income. Millions will run up arrears and damage their financial health. And thousands will risk their physical health because they cannot heat their homes.

Averting a winter catastrophe will require different, not just larger, interventions from the incoming prime minister. The government’s response to date has been to insist that consumers face the true cost of energy to provide strong incentives to reduce consumption. At the same time, it provided lump-sum discounts and payments, particularly to those on benefits, to cover some of those costs.This is what the economics textbooks call for and it made sense when bills hit £2,000. It is not viable when they are more than double that amount. The cliff edge between those who do get support and those who get next to nothing becomes too great — earning £1 too much, so that you don’t qualify for universal credit, could cost you more than £1,000. Because the payments are a lump sum they take no account of how big increases in energy bills are for different households. The challenge to come is far greater than average for a large, low-income family renting a poorly insulated home they are powerless to improve. The scale of the crisis calls for a radical approach. We will have to cap energy costs below market rates, so it’s time to focus on the hard questions involved. How far do we go? Should everyone, or just those on low and middle incomes, benefit? And how will we pay the bill, which will amount to tens of billions of pounds? There are some big trade-offs. A radical social tariff would be the best targeted approach for those on lower incomes seeing their bills rise most, but is harder to implement than a price cut for everyone. Borrowing will take a lot of the strain but windfall and solidarity taxes should be imposed if we are to reduce bills significantly without forcing the Bank of England into even bigger interest rate rises. None of this is easy, but the energy crisis has made us much poorer as a country. The phoney war phase of this crisis is over, the doing something about it part should begin urgently. More