Fed hopes to maintain credibility on inflation while slowing hikes
Political considerations start to weigh on monetary tightening
UK opts for stability as Sunak seeks to restore orthodox economic policies
Some of those managing the smart money are getting fed up with the Fed. Barry Sternlicht, a billionaire who heads Starwood Capital Group, referred over the weekend to Jerome Powell and “his band of lunatics,” while David Rosenberg, head of the eponymous research group, said on Monday that Powell has gone from Bambi to Godzilla.
But of course money managers would complain when the Fed is ratcheting up interest rates without worrying if they plunge the economy into recession. What they blame the Fed policymakers for is waiting too long to fight inflation and then taking a sledgehammer to it.
There’s little question in anyone’s mind that Powell and his groupthink Federal Open Market Committee made a mistake about inflation last year, and we’re all paying the price now. The question at this point is whether a sledgehammer is the right tool to fix it.
Some FOMC members seem to be having second thoughts. San Francisco Fed president Mary Daly said on Friday that it’s time to start talking about slowing the pace of interest rate hikes.
Although the FOMC is expected to go ahead with a 75 basis-point (bp) hike in November, investors are beginning to hope that a December hike might go down to 50 bp.
Daly’s remarks echoed those of Fed Governor Christopher Waller, who earlier this month said the monetary policy panel would be having “a very thoughtful discussion about the pace of tightening at our next meeting,” which is set for Nov. 1-2.
But the remarks from the money managers, like earlier comments from economists Mohamed El-Erian and Nouriel Roubini, suggest that the Fed policymakers have lost a lot of credibility. The problem is, they are still the ones making decisions—not all the people who know better.
Minneapolis Fed chief Neel Kashkari has worried aloud that the increased unemployment from a recession hits black workers disproportionately, bringing unemployment in that segment of the population up to double the headline level.
Sternlicht is worried about the impact on low-income workers in general.
“So the rich guy who loses 30%, he’s still rich, right? But the poor guy who’s working in an hourly job that loses that job, he’s going to say: ‘Capitalism is broken, it didn’t work for me. I lost my job. And this whole system has to go out the door.’ You’re going to have social unrest.”
Whatever happens with control of the two houses of Congress in the U.S. midterm elections, Joe Biden will still be president and his administration will still be in charge. For that matter, if Republicans take control of Congress this time around, they will want to win elections in 2024, so these political considerations are quite real.
The northern European hawks have the upper hand at the European Central Bank, at least for the moment, as investors look for a hike in the policy rate of at least 75 bp, and perhaps even a full percentage point at the governing council meeting this week.
The voices of doves like ECB chief economist Philip Lane, who has argued that inflation caused by energy shortages from the Ukraine war are less susceptible to interest-rate hikes, have receded as inflation shows itself more broad-based.
The UK has been on its own track, but some measure of calm has been restored with the choice of former finance minister Rishi Sunak as prime minister to replace the ill-fated Liz Truss and her poorly timed plan for trickle-down stimulus.
Sunak is expected to keep the moderate Jeremy Hunt as his finance minister and to present a plan on schedule next week to reduce the UK’s burgeoning debt. Sunak quickly brushed aside any suggestion of a general election to get a new mandate, relying instead on the comfortable majority Boris Johnson won in 2019.
Sunak has until the beginning of 2025 to persuade voters this party can put Britain on the right track, but his first challenge will be to keep his MPs in line as many of them don’t like his policies.
Bank of England Governor Andrew Bailey, meanwhile, can stop fighting fires from a bond sell-off and can get back to tightening monetary policy to combat the UK’s own virulent inflation.
The central bank has said it will start selling some of its government bond portfolio Nov. 1, the day after the government’s planned fiscal plan is released, and the Monetary Policy Committee is due to meet Nov. 3 to discuss interest-rate hikes.