Economy

A larger “sacrifice” will be needed to tame inflation than in previous bouts of monetary policy tightening, according to European Central Bank officials who warned that price growth risks spinning out of control if forceful action is not taken.Isabel Schnabel, an ECB executive board member, and François Villeroy de Galhau, governor of the Banque de France, said on Saturday that European monetary policy would have to remain tight for an extended period of time.Their remarks at the Jackson Hole gathering of central bankers from around the world in Wyoming, US, echoed those of Federal Reserve chair Jay Powell, who on Friday vowed to “keep at it” to quash inflation. The pace of price growth is running at a level not seen for decades in many advanced economies.“Central banks are likely to face a higher sacrifice ratio compared with the 1980s, even if prices were to respond more strongly to changes in domestic economic conditions, as the globalisation of inflation makes it more difficult for central banks to control price pressures,” Schnabel said. The sacrifice ratio measures how much pain central banks will need to inflict in terms of weaker growth and lower job creation in order to bring inflation back under control.Villeroy said there should be “no doubt” about the bank’s willingness to raise rates beyond the so-called neutral rate, a level that neither aids nor constrains growth. He estimated this rate to be between 1 and 2 per cent. Villeroy said it could reach this level “before the end of the year”, adding: “Our will and our capacity to deliver on our mandate are unconditional.” Eurozone inflation is expected to set a new record of 9 per cent in the year to August when the latest data is released on Wednesday.Schnabel called for “strong determination to bring inflation back to target quickly”. She added that if a central bank “underestimates the persistence of inflation — as most of us have done over the past one and a half years — and if it is slow to adapt its policies as a result, the costs may be substantial”.The ECB ended eight years of negative interest rates last month by raising its deposit rate by a half percentage point to zero, surpassing its earlier guidance. Some members of its 25-person governing council are calling for it to consider going further with a 0.75 percentage point rate rise at its meeting on September 8.Schnabel, a former German economics professor who joined the ECB board at the start of 2020, is one of the central bank’s most influential voices on policy as its head of market operations. She warned that “unprecedented pipeline pressures, tight labour markets and the remaining restrictions on aggregate supply threaten to feed an inflationary process that is becoming harder to control the more hesitantly we act on it”.Inflation expectations are rising among the public and professional forecasters, many of whom expect prices to keep rising by more than the ECB’s 2 per cent target for several years, Schnabel said, adding that the institution’s credibility was at stake.“Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high,” said Schnabel. “In this environment, central banks need to act forcefully.”Villeroy — usually a centrist on the ECB governing council — echoed the hawkish tone. But the French central bank governor signalled that he still thought a 0.5 percentage point rate rise would be enough next month, saying he favoured “another significant step in September”.

The comments come a day after Powell reset expectations about how high interest rates in the US might need to rise and for how long, as the Fed grapples with excessive price pressures driven in part by supply-related factors but also excessive demand.The US central bank chair warned that efforts to cool the economy were likely to require a “sustained period” of low growth, a weaker labour market and “some pain” for households and businesses.Like his counterparts at the ECB, Powell said a failure to successfully tame inflation now would lead to higher costs later on, suggesting the Fed is unlikely to pause its tightening cycle anytime soon.In contrast, speaking from the audience during the Q&A section of the Jackson Hole panel, Haruhiko Kuroda, governor of the Bank of Japan, set out why his country was not aggressively tightening monetary policy. “We have no choice other than continue monetary easing until wages and prices rise in a stable and sustainable manner,” he said. Kuroda projected that Japanese inflation would approach 3 per cent by the end of this year and then decelerate towards 1.5 per cent next year. More

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

The ECB raised rates by 50 basis points to zero in July to fight inflation that is now approaching double-digit territory and another such move is now fully priced in by financial markets. Considered a centrist on the bank’s rate-setting Governing Council, Villeroy said that rates should keep rising until the ECB hits the neutral level, which is somewhere between 1% and 2%. At the neutral rate, the central bank neither stimulates nor holds back growth. “We could be there before the end of the year, after another significant step in September,” Villeroy told the U.S. Federal Reserve’s Jackson Hole Economic Symposium.While markets have been betting on a 50 basis point move in September, several ECB policymakers, including Dutch central bank chief Klaas Knot and Austria’s Robert Holzmann, have said that 75 basis points should also be part of the discussion. Villeroy said the ECB was willing to go higher than the neutral level, if needed.”Have no doubt that we at the ECB would if needed raise rates further beyond normalization: bringing inflation back to 2% is our responsibility; our will and our capacity to deliver on our mandate are unconditional,” he added.Specific forward guidance, as provided for years, is now viewed as unadvisable given global economic uncertainties. Villeroy did not openly acknowledge the increasing risk of a recession, but did note that growth prospects were receding while the inflation outlook is deteriorating.The banker said the ECB also needs to consider changes to how it handles excess reserves. Banks sit on trillions of euros worth of excess liquidity and an increase of rates into positive territory provides banks with large risk-free returns, leaving the central bank with similar losses. Villeroy promised a “swift and pragmatic” assessment of reserve remuneration, but did not provide specific proposals.”Just as we did with the tiering scheme, we have to think about a reserve remuneration system adapted to this new context,” he said. More

Governments around the world opened their coffers during the COVID-19 pandemic to prop up economies, but those efforts have helped push inflation rates to their highest levels in nearly half a century, raising the risk that rapid price growth will become entrenched.Central banks are now raising interest rates, but the new study, presented on Saturday at the Kansas City Federal Reserve’s Jackson Hole Economic Symposium argued that a central bank’s inflation-fighting reputation is not decisive in such a scenario. “If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflationary pressure,” said Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed.”As a result, a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise,” the paper argued. “In this pathological situation, monetary tightening would actually spur higher inflation and would spark a pernicious fiscal stagflation.”On track this fiscal year to come in at just over $1 trillion, the U.S. budget deficit is set to be far smaller than earlier projected, but at 3.9% of GDP, it remains historically high and is seen declining only marginally next year.The euro zone, which is also struggling with high inflation, is likely to follow a similar path, with its deficit hitting 3.8% this year and staying elevated for years, particularly as the bloc is likely to suffer a recession starting in the fourth quarter.The study argued that around half of the recent surge in U.S. inflation was due to fiscal policy and an erosion in beliefs that the government would run prudent fiscal policies.While some central banks have been criticised for recognising the inflation problem too late, the study argued that even earlier rate hikes would have been futile.”More hawkish (Fed) policy would have lowered inflation by only 1 percentage point at the cost of reducing output by around 3.4 percentage points,” the authors said. “This is a quite large sacrifice ratio.”To control inflation, fiscal policy must work in tandem with monetary policy and reassure people that instead of inflating away debt, the government would raise taxes or cut expenditures. More

The student loan plan is the latest example of Democrats practicing the art of the possible on the nation’s most pressing economic challenges and ending up with risky or patchwork solutions.WASHINGTON — President Biden’s move this week to cancel student loan debt for tens of millions of borrowers and reduce future loan payments for millions more comes with a huge catch, economists warn: It does almost nothing to limit the skyrocketing cost of college and could very well fuel even faster tuition increases in the future.That downside is a direct consequence of Mr. Biden’s decision to use executive action to erase some or all student debt for individuals earning $125,000 a year or less, after failing to push debt forgiveness through Congress. Experts warn that schools could easily game the new structure Mr. Biden has created for higher education financing, cranking up prices and encouraging students to load up on debt with the expectation that it will never need to be paid in full.It is the latest example, along with energy and health care, of Democrats in Washington seeking to address the nation’s most pressing economic challenges by practicing the art of the possible — and ending up with imperfect solutions.There are practical political limits to what Mr. Biden and his party can accomplish in Washington.Democrats have razor-thin margins in the House and Senate. Their ranks include liberals who favor wholesale overhaul of sectors like energy and education and centrists who prefer more modest changes, if any. Republicans have opposed nearly all of Mr. Biden’s attempts, along with those of President Barack Obama starting more than a decade ago, to expand the reach of government into the economy. The Supreme Court’s conservative majority has sought to curb what it sees as executive branch overreach on issues like climate change.As a result, much of the structure of key markets, like college and health insurance, remains intact. Mr. Biden has scored victories on climate, health care and now — pending possible legal challenges — student debt, often by pushing the boundaries of executive authority. Even progressives calling on him to do more agree he could not impose European-style government control over the higher education or health care systems without the help of Congress.The president has dropped entire sections of his policy agenda as he sought paths to compromise. He has been left to leverage what appears to be the most powerful tool currently available to Democrats in a polarized nation — the spending power of the federal government — as they seek to tackle the challenges of rising temperatures and impeded access to higher education and health care.Arindrajit Dube, an economist at the University of Massachusetts Amherst who consulted with Mr. Biden’s aides on the student loan issue and supported his announcement this week, said in an interview that the debt cancellation plans were necessarily incomplete because Mr. Biden’s executive authority could reach only so far into the higher education system.“This is an imperfect tool,” Mr. Dube said, “that is however one that is at the president’s disposal, and he is using it.”But because the policies pursued by Mr. Biden and his party do comparatively little to affect the prices consumers pay in some parts of those markets, many experts warn, they risk raising costs to taxpayers and, in some cases, hurting some consumers they are trying to help.Mr. Biden’s plan would forgive up to $10,000 in student debt for individual borrowers earning $125,000 a year or less and households earning up to $250,000, with another $10,000 for Pell grant recipients.Cheriss May for The New York Times“You’ve done nothing that changes the structure of education” with Mr. Biden’s student loan moves, said R. Glenn Hubbard, a Columbia University economist who was the chairman of the White House Council of Economic Advisers under President George W. Bush. “All you’re going to do is raise the price.”Mr. Hubbard said Mr. Biden’s team had made similar missteps on energy, health care, climate and more. “I understand the politics, so I’m not making a naïve comment here,” Mr. Hubbard said. “But fixing through subsidies doesn’t get you there — or it gets you such market distortions, you really ought to worry.”Mr. Biden said on Wednesday that his administration would forgive up to $10,000 in student debt for individual borrowers earning $125,000 a year or less and households earning up to $250,000, with another $10,000 in relief for people from low-income families who received Pell grants in school.What’s in the Inflation Reduction ActCard 1 of 8What’s in the Inflation Reduction ActA substantive legislation. More