Central banks caught between a return to inflation and a slowdown in growth

Posted on Sep 29, 2021 at 6:25 PMUpdated Sep 29, 2021, 7:41 PM

Central bankers are inherently cautious. But, interviewed during a roundtable of the central bankers’ forum of the ECB on Wednesday, the leaders of the most powerful monetary institutes in the world seemed to be literally walking on eggshells. Whether it is the American Jerome Powell at the head of the Federal Reserve (Fed), the French Christine Lagarde, president of the European Central Bank or the English Andrew Bailey, governor of the Bank of England, all have started to negotiate the end of the ultra-accommodating monetary policies put in place during the Covid crisis.

A particularly delicate maneuver. As evidenced by the violent rise in long rates in recent days in the United States (they have taken more than 20 basis points in one week). The markets got the message from the central banks and started to adjust. This adjustment should not turn into a slippage.

Central bankers have therefore once again insisted on the threats weighing on growth and the transitory nature of inflation, while showing a certain vigilance. During her opening speech, Christine Lagarde explained that nothing indicates that the “rise in inflation [est en train de se généraliser] to the whole economy ”. She warned: “The main challenge is to ensure that we do not overreact to transient supply shocks that have no impact in the medium term. “The small inflation spike in the euro zone is above all linked to base effects (prices had collapsed in 2020) and bottlenecks linked to the reopening of economies, she explained on Wednesday .

Reassuringly, she said “do not see contamination of inflation in wage increases”. Market expectations also remain “anchored” and consistent with a target of 2%.

Inflation surge

Jerome Powell nevertheless warned: “Inflation will move well beyond the target in the coming months before easing off”. For him, “it is frustrating that congestion and supply problems do not improve”. Indeed, what the entire financial community has, according to him, poorly anticipated, are these supply difficulties. He recalled that at the start of the year, inflation forecasts were 2% for the end of 2021… while the price increase now exceeds 5% in the United States. Christine Lagarde hopes that these problems will be resolved in mid-2022 but Jerome Powell, he preferred not to comment.

The American central banker however repeated that this surge of inflation would be “temporary”, explaining that he meant by this term that “this peak of inflation will not lead to a new inflation regime”. Reassuring? May be. But when asked what his fears are for the future, Jerome Powell is frank: “My concern is the tension that there could be between two goals in the next few years, that is. – say between maximizing the level of employment and stabilizing prices. Managing these two priorities will be a real challenge ”. Investors, but also businesses and households have been warned.

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