Aurelia Butler

“Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.” Thus did Jay Powell, chair of the Federal Reserve, open the press conference that followed the meeting of the Federal Open Market Committee last week. This was a grovelling apology. But it also sounded rather like Mario Draghi’s celebrated “whatever it takes” remark of July 2012.What does the Fed’s renewed commitment to low inflation signify for the future? Powell argued optimistically that “we have a good chance to have a soft or softish landing”. By this he meant that demand would be brought closer to supply, which could in turn “get wages down, and get inflation down without having to slow the economy and have a recession and have unemployment rise materially”. He also argued that “the economy is strong, and is well positioned to handle tighter monetary policy . . . but I’ll say I do expect that this will be very challenging”.The most puzzling thing about this line of argument is not the admission that the suggested path will be hard to achieve, but the belief that it will reach its destination. Is it even possible to lower inflation to target just by trimming overheating of the labour market?Some suggest it might be. Alan Blinder of Princeton University and former Fed vice-chair has recently noted that on at least seven of the last 11 occasions, Fed tightening did lead to “pretty soft” landings. The difficulty with these comparisons is that inflation is now at its highest level for 40 years. Even “core” annual consumer price inflation (without energy and food) was 6.5 per cent in the year to March 2022.If one believes this will just fade away after a modest tightening, one must still think inflation is mostly “transitory”. That is highly optimistic. Crucially, the US has enjoyed an exceptionally vigorous recovery. Output growth last year was far stronger than in other leading high-income countries. The recovery of the labour market has been robust, with high vacancy and quit rates and a swift return to low unemployment. Only employment ratios remain a little below previous peaks. Moreover, wage growth has also been strong, as Jason Furman, former chair of the Council of Economic Advisers, notes, though it has been slowing a little.

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The difficulty is that, contrary to Powell’s protestations, inflation does not usually just fade away in such a strong economy. Undoubtedly, a part of measured inflation is due to domestic and global supply constraints, discussed in detail in the Economic Report of the President last month. But this is also a way of saying that excess demand is now pressing on supply at home and abroad. If Powell is to prove correct, supply constraints must at least get no worse, while companies and workers adversely affected by them must take the reduced profits and real incomes on the chin. Yet why should they do so? As Furman notes: “The 8.5 per cent increase in the consumer price index in the 12 months through March is much faster than the pace of nominal wage growth, leading to the fastest declines in real wages over a year in at least 40 years.” Conditions for a cost-price spiral now exist. The hope must instead be that supply and labour market constraints reverse, generating falling prices and so eliminating almost all of the need to regain lost incomes.This view that a significant recession will not be needed to curb inflation is optimistic. But this is not the only form of optimism on display today. The other is the belief that such a recession can be avoided. The difficulty here is that fine-tuning a slowdown will be even harder than it normally is. One uncertainty is that reduced real incomes from high inflation are likely to curb demand, but how far they will do so depends on how willingly consumers spend savings built up during the Covid-induced recession.Another and probably more important uncertainty is over how tighter monetary policy affects financial conditions in the US and abroad. One must not forget that there are exceptionally high levels of dollar-denominated debt across the world. Moreover, asset prices have also reached extreme levels: US house prices (measured on the S&P/Case-Shiller National Home Price Index, deflated by the consumer price index) in February 2022 were 15 per cent higher than before the financial crisis; and the cyclically-adjusted price/earnings ratio on stocks was higher than in any period since 1881, except for the late 1990s and early 2000. Collapses in asset prices in response to monetary tightening would turbocharge Fed policy, but unpredictably. Even modest Fed action has had large impacts: expected interest rates have jumped and markets have hit turbulence. Is what we have seen the end of that upheaval or, as seems more likely, only its beginning?Except for historians, it may be idle to ask how we got into this pickle. Obviously, it is partly due to unpredictable shocks. But policymakers have been too optimistic about inflation. They should have started to normalise a monetary policy introduced in an extraordinary crisis once the worst had passed. The Fed is removing the punch bowl too late.It is, alas, quite likely that a recession will now be needed to keep inflationary expectations under control. Moreover, even if it turns out to be unnecessary, because inflation just fades away, a recession may still occur, simply because even a modestly tighter policy wreaks havoc in today’s fragile asset markets. But the Fed has to sustain its battered credibility on inflation. That is the heart of the central bank’s mandate. It must screw up its courage and do what it [email protected] Martin Wolf with myFT and on Twitter More

Germany’s central bank boss has called for eurozone interest rates to rise in July, warning that policymakers risk acting too late and being forced into a Paul Volcker-style “strong and abrupt” increase in borrowing costs.Joachim Nagel said in a speech in Eltville on Tuesday that there was “disturbing evidence that the increase in inflation is gaining momentum”. More consumers and companies expect prices to keep rising rapidly, which meant “the risk of acting too late is increasing notably”.The Bundesbank boss joins several fellow European Central Bank governing council members in calling for it to end net bond purchases at the end of June and raise its deposit rate in July. Inflation is running at almost quadruple the ECB’s 2 per cent target at 7.5 per cent, a record since the single currency was launched in 1999. In Germany prices are rising even faster, up 7.8 per cent, the most since 1981.Nagel, who took over as president of the Bundesbank in January, said Russia’s “horrific” invasion of Ukraine had “added to the pre-existing price pressures, both directly and indirectly” by driving up the price of energy and other commodities and worsening disruption to global supply chains.Nagel added that the war “may clearly accelerate pre-existing tendencies in both the short and the long run, as exemplified in energy markets and international trade”. Prominent monetary economists such as Charles Goodhart and Manoj Pradhan have warned that inflation could be kept higher than in recent years owing to structural changes in the economy, such as ageing populations, a retreat from globalisation and a shift away from fossil fuels. Nagel said the Bundesbank had found “concerning” results in two recent surveys. One showed German consumers’ expectations of where inflation would be in five years had risen to 4.5 per cent in February, up from 3.5 per cent a year ago. Another revealed companies’ equivalent expectations rose from 3.4 per cent in January to 4.5 per cent in April.“All this suggests that higher inflation rates will prevail in the near future and that inflation expectations could become less anchored,” he said.The Bundesbank warned last month that an immediate ban on Russian gas imports would knock 5 percentage points off German gross domestic product, potentially causing a recession in Europe’s largest economy this year.A sanctions-induced recession “could exert a degree of disinflationary pressure”, said Nagel, adding: “Nevertheless, on balance, the inflationary factors of sanctions such as an energy embargo would clearly prevail, at least in the short term.”“Delaying a monetary policy turnround is a risky strategy,” he said. “It is worth recalling the conditions under which the last, most prominent disinflation episode — the Volcker disinflation at the end of the 1970s — played out,” he said, pointing out that US interest rates rose higher than 20 per cent at that time.As US Federal Reserve chair, Volcker earned a venerated status among central bankers for his efforts to squeeze out inflation that sent the US economy into a steep recession in the early 1980s. Nagel said the situation in the late 1970s “was different in many respects” because public and private debt ratios were much lower then and inflation had already been high for more than a decade. 

Becoming the first ECB rate-setter to make the comparison between today’s situation and the Volcker era, he added: “There is one lesson I would draw from this: delaying a monetary policy turnround is a risky strategy. The more inflationary pressures spread, the greater the need for a very strong and abrupt interest rate hike.”He warned such a scenario would “place excessive strain on firms and households”, while creating vulnerabilities in the financial system and prompting heavily indebted governments to push back against rate rises, “putting the independence of central banks at risk”.Nagel, a former executive at the Bank for International Settlements, worked at the Bundesbank for 17 years before leaving in 2016 and was chosen by Germany’s new government last November to take over from Jens Weidmann who decided to quit after a decade in the job. More

LONDON (Reuters) -British Prime Minister Boris Johnson returned to his election pledges to tackle regional inequalities and maximise post-Brexit freedoms on Tuesday, hoping to win back voters in southern England who abandoned his party in local polls last week.In the traditional Queen’s Speech, read for the first time in 59 years by Prince Charles rather than Queen Elizabeth due to her mobility problems, Johnson said his Conservative government would “deliver on the promises we made” in the 2019 election.But there was little to comfort the millions of people struggling with higher fuel and food costs, with the government reiterating that it would “repair the public finances” rather than channel additional money to cushion the blow. “Her Majesty’s government’s priority is to grow and strengthen the economy and help ease the cost of living for families,” Charles said, reading a text written by the government that sets out its plans for the next parliamentary session.In a ceremony full of pomp and pageantry, Charles – who wore the uniform of an admiral of the fleet – read the speech in front of robed lords and lawmakers, who had walked from the House of Commons to the upper chamber, the House of Lords, led by Johnson and opposition Labour leader Keir Starmer.Charles, Queen Elizabeth’s heir, was drafted in after Buckingham Palace said on Monday the 96-year-old monarch was experiencing “episodic mobility problems” and had reluctantly decided she could not attend.The Queen’s Speech set out 38 bills, including measures to revitalise Britain’s high streets, crack down on illicit finance and make the City, London’s financial district, more attractive to global investors after the country left the European Union.In an introduction to the legislative programme, Johnson said: “This is a Queen’s Speech to get our country back on track and ensure that we deliver on the promises we made at the start of this parliament.””While we must keep our public finances on a sustainable footing – and we cannot completely shield people from the fallout from global events – where we can help, we will.”SHIFTING FOCUSThe raft of proposed laws the government wants to push through parliament was welcomed by Conservative lawmakers. David Jones, a former minister, told Reuters it showed “an ambitious government agenda, seizing the opportunities of Brexit”.Johnson’s government is keen to turn the page on scandals after months of reports of COVID-19 lockdown-busting gatherings at the prime minister’s Downing Street office and residence.After Johnson and his finance minister, Rishi Sunak, were both handed fines for one such gathering, opposition leader Starmer stepped up the pressure by pledging to resign if police found he had also broken lockdown rules.Downing Street is still awaiting the results of a police investigation into other gatherings.Johnson is also under pressure to tackle a growing cost-of-living crisis, but the Queen’s Speech offered no clues on any immediate action the government might take to help people struggling to pay their bills.The Bank of England said last week Britain risks a double-whammy of a recession and inflation above 10%.Johnson’s spokesman said the government had already put in 22 billion pounds to address immediate pressures and that focusing on boosting economic growth offered a more sustainable solution. “It’s an important point for the public to understand that our capacity to inject money is finite,” he said.Johnson was punished in last week’s local elections, when voters in southern England abandoned his party over the scandals and the cost of living. This prompted some lawmakers to urge a return to a more traditional Conservative agenda of tax cuts and preventing housing from encroaching on rural areas.With his critics falling short of the numbers needed within the Conservative Party to try to oust him, Johnson hopes that by refocusing on an agenda he believes won him a large majority in the 2019 election he can reboot his premiership. More

The head of Stellantis has warned that carmakers will struggle to get hold of enough batteries in the next three to four years as they race to roll out electric vehicles, leaving some manufacturers by the wayside as supply bottlenecks pile up.Carlos Tavares told the Financial Times’ Future of the Car conference on Tuesday that car manufacturers may not be able to build their own battery plants fast enough to avoid shortages in the medium term.“We will have around 2025 or 2026 a short supply of batteries,” he said. “And if there is no short supply of batteries then there will be a significant dependence of the western world vis-à-vis Asia.”The battery shortages would add to other problems such as growing concerns over how and where raw materials were extracted, he added.Tavares said the battery supply challenges would feed into the bigger problem of keeping cars affordable in the switch to electric models, which would be an issue for manufacturers’ margins in a “Darwinian period for the industry”.“Those not able to transform will be in trouble,” he said.Volkswagen boss Herbert Diess said at the Future of the Car summit on Monday that his company was unlikely to be able to go faster in pushing out electric cars because of supply constraints on batteries and the slow roll out of charging stations. The German group plans to derive 50 to 60 per cent of car sales from electric models in 2030, from under a quarter now.“Could it happen faster? We could accelerate a bit more maybe but not a lot,” said Diess, who also called for a negotiated settlement in Ukraine during the summit.Stellantis, formed last year through the merger of Fiat Chrysler and Peugeot maker PSA, and other European manufacturers have been investing in battery production ventures in the region, but many are not fully up and running unlike those in markets such as South Korea. The carmaker has ambitious plans to become one of the leading producers of battery powered vehicles as it hopes to challenge Tesla and Elon Musk.Tavares wants Stellantis to sell 5mn battery powered vehicles by 2030, up from just under 400,000 last year, and is aiming for an all-electric approach in Europe by then.The sourcing of raw materials, including those needed to make lighter frames for cars weighed down by batteries, would create problems down the line too, said Tavares.“Everyone is going to pour EV vehicles on the market,” he said. “Where is the charging infrastructure? Where are the geopolitical risks of sourcing those raw materials? Who is looking at the full picture of this transformation?”Renault chief executive Luca de Meo also warned about the effect on jobs from new regulations on climate change and the electric shift at the FT’s car summit on Monday.He said European regulations could cost up to 70,000 jobs in France as the rules, which impose stricter limits on carbon dioxide and nitrogen oxide emissions from petrol and diesel cars, vans, trucks and buses, could make vehicles more expensive and hit demand. More

“Once we get in the range of the neutral rate, we can then determine whether inflation remains at a level that requires us to put the brakes on the economy or not,” Barkin said in prepared remarks to a local chamber of commerce in North East, Maryland, adding the central bank could avoid inducing a 1980s-style recession as its tries to drive down inflation.The central bank last week raised its benchmark overnight lending rate by half a percentage point and has pivoted in recent months to become more aggressive in tightening policy as it seeks to return inflation, which remains at a 40-year high, closer to its goal.”We will do what we need to do,” Barkin said, noting in his speech Fed Chair Jerome Powell’s recent comments that 50 basis point hikes are on the table for the Fed’s next two policy meetings in June and July.There are some tentative signs inflation has peaked, which would be welcomed by Fed policymakers as they seek to avoid having to become more aggressive with rate hikes to rebalance the economy.A U.S. government report on Wednesday is expected to show consumer price inflation slowed slightly in April. That said, the Fed’s preferred measure of inflation is still running more than three times above the central bank’s goal.But Russia’s invasion of Ukraine, which has driven up food and energy prices, and recent lockdowns in China to tamp down COVID cases remain a great source of uncertainty in assessing how long outsized inflation pressures will remain. More