Monetary tightening acts with long and wicked lags
The most aggressive rate cycle since the Volcker depression of the early 1980s has yet to feed through fully to the real economy and to debt refinancing.
Jay Powell is a dove at heart and must be aware of the dangers. At Sintra, he warned of lag effects from past tightening and suggested that the labour market is no longer overheating. The implication is that the Fed should stop raising rates immediately.
Instead he talked up two more rises, bounced into this contradiction by the inflation scorched-earthers (Bullard, Kashkari, Waller, Mester, Barkin).
The eurozone is in a credit crunch and a deepening recession, not that this will stop the European Central Bank pressing ahead with more punishment beatings. It is well on the way to another of its procyclical blunders.
Italy’s Giorgia Meloni is right to lash out at the ECB’s “simplistic formula”, and right that “the cure will prove more damaging than the disease”.
Ambrose Evans-Pritchard Telegraph 7 July 2023
“the sufficiently restrictive zone” for the central bank’s main policy rate target.
Bullard put the zone somewhere between 5% to 7%, up from the current fed-funds rate range of between 3.75% to 4%.
That was enough to cause investors to sell off stocks and bonds in tandem, push the dollar higher, and rewire expectations around how high interest rates could go.
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