We’ve known for several weeks now that disinflation is not continuing in the way the US central bank had hoped. So instead of six rate cuts this year, the markets are counting on just one, and that is reasonable on their part. This was reported by Larry Summers for Bloomberg, according to whom the Fed was exaggerating with confidence in the further decline in inflation.
The economist believes that, among other things, the latest data show higher than expected inflation in housing and inflation in services may not fall as quickly as expected. But overall, it doesn’t have to significantly change the final image. The latter indicates that the most likely rates are unchanged or with only a slight decrease this year. A greater risk than a significant cooling of the economy is a scenario in which economic activity would remain strong, and this would also keep inflation high. Regarding the publication of new data, the economist added that it does not necessarily apply that “the more there is, the more we will know.”
Bloomberg supplemented the economist’s words with the following graph, which shows the creation of jobs and the development of hourly wages. The picture shows that the labor market is cooling, but economist Thorsten Slok commented on the numbers on CNBC, saying that there will be a significant upward revision in job creation.
According to the economist, the leadership of the US central bank is also too strongly convinced that the monetary policy is sufficiently tight. Summers, he said, continues to not think there is any likelihood of further rate hikes. But he believes the Fed is forming too strong a view at a time when the data is against them. As a result, these opinions are held too firmly. An example could be the development in 2021 and possibly the current situation. More precisely, the view that monetary policy is sufficiently restrictive. According to the economist, this is not certain, and factors such as shifts in neutral rates play a role here, to which real rates can be compared in an attempt to determine the degree of restriction.
The economist was answering a question regarding developments in Japan and, in particular, the exchange rate of the yen. He replied that if the size of the financial markets is taken into account, it is clear that the intervention of the central bank in the currency markets is not of much importance. They are opposed by a much larger flow of private sector capital. Even so, some countries resort to interventions in the event of more extreme movements in exchange rates. And sometimes there is even a desired turnaround.
According to the expert, even in the case of a turnover on the currency markets, it is not a direct consequence of interventions, but a reflection of changes on the part of private capital. Summers then followed up on the Japanese theme with a related reflection on the US dollar. According to him, he is now extremely strong. And the strength of the US currency has so far helped reduce inflationary pressures in the domestic economy.
Source: Bloomberg
