On Wednesday, June 29, the presidents of the three major central banks in Europe and the United States gathered in a rare gathering to convey a key message: the world is shifting to a higher inflation mechanism, and the low interest rate strategy of the past two decades will no longer apply.
The ‘era of low inflation’ is over
Inflation in the U.S., U.K. and euro zone is currently well above target, and central bankers believe this is likely to persist as global trade and production patterns reset.
At the ECB’s annual monetary policy forum, ECB President Christine Lagarde said bluntly: “I don’t think we’re going back to a low inflation environment.
“Because of the pandemic and massive geopolitical shocks, forces have been unleashed that will change the landscape and the pattern of how we operate,” she said.
Lagarde said that the “on-time completion” of the manufacturing industry has also been a downward force in suppressing inflation over the past 20 years, and everything has changed after the epidemic:
“The changing times will herald more turmoil. Now that has changed, and may be moving toward a system we are uncertain about. Geopolitical and pandemic shocks will change the environment we were once familiar with and the way central banks design policy. background pattern.”
Federal Reserve Chairman Jerome Powell pointed out that globalization shocks, an aging population, low productivity and technological development all mean that prices can no longer “stay ultra-low.”
Powell said:
“So far, the past decade has been the pinnacle of the disinflationary forces we have faced… The world seems to be gone now, at least for now. We are now facing a different force and must A very different way to think about monetary policy.”
Bank of England Governor Bailey said that inflation is a response to a series of large and successive supply shocks, which of course affect expectations, and when all factors are taken into account, inflation is not transient in the traditional sense.
The era of “low interest rates” is over
Persistently high inflation means that the low-rate strategy of the past two decades will no longer apply.
Since the financial crisis, the main enemy facing central bankers in Europe and the United States has been too low inflation, which allows them to use near-zero interest rates and large-scale bond purchases to boost the economy in times of recession and weak recovery.
Now, under the supply chain chaos caused by the epidemic and the soaring commodity prices caused by the conflict between Russia and Ukraine, the soaring price pressure has become their new enemy.
In 2020, the Federal Reserve adjusted its monetary policy framework from a 2% inflation target to an average 2% inflation target. At the same time, it also fine-tuned its employment maximization target, emphasizing that as long as there is no excessive inflationary pressure, it will be possible to achieve full employment or more. At high levels, monetary policy will not be tightened.
At Wednesday’s annual meeting, Powell acknowledged that the current environment raises the question of whether this approach still applies:
“If you want to know the lessons of the past decade, look at our framework. These were based on the low inflation environment we were in. Now, we are in a very different world, where inflation is higher and supply With many shocks, inflationary forces are strong around the world.”
The market currently expects the fed to raise interest rates by 175 basis points this year and peak at 3.75% to 4% in 2023. This will be the Fed’s most hawkish rate hike cycle since the 1990s, but with recession risks listed, Markets also expect a modest rate cut by the Fed in 2024.
However, Derek Tang, an analyst at LH Meyer, an independent research consultancy, noted that with policymakers acknowledging that the economy will experience some pain, a soft landing may not be possible, but high inflation is worse, meaning “a major shift” that may would prevent a rate cut in 2024.