Investors have been told that central bankers on both sides of the Atlantic will “stay the course” on interest rate increases to cool their economies and tame high inflation.
European Central Bank President Christine Lagarde warned that more big interest rate hikes await in comments later echoed by a senior US Federal Reserve official.
“We will stay in the cycle until … we can bring inflation back to 2 percent in time,” the ECB chief said in a panel discussion during the World Economic Forum.
Lyle Brainard, Vice Chairman of the Federal Reserve, has indicated that the US central bank should also do more to bring inflation closer to its 2 percent target, despite signs that consumer spending is beginning to ease, the labor market is cooling and the rate is slowing. The pressure eased.
Inflation is high, and it will take time and determination to get it back to 2 percent. Brainard said at an event hosted by the University of Chicago Booth School of Business.
The Federal Reserve and European Central Bank have raised interest rates rapidly since last year to curb inflation, which they initially described as “temporary”. The two central banks are assessing the amount of additional stress on their economies, which will be complicated by the delayed effects of the tightening on the economy.
Lagarde said financial markets should “revisit” that the European Central Bank will soon slow its interest rate increases in response to signs that inflation in the eurozone has peaked.
Krishna Guha of research firm Evercore ISI said the ECB was “early in the Fed’s tightening cycle” and that its “default course” was to continue with half-point moves at the meetings in February and March. Eurozone rates remain lower than US and UK borrowing costs.
Brainard did not comment on the size of the next Fed rate hike, which is scheduled to be announced on February 1, but noted that the slower pace would enable the Fed to “evaluate more data as we move the policy rate closer to a sufficiently restrictive level.”
Most officials indicated their support for the US central bank to shift from a half-point increase to 0.25 percentage point, contrary to the European Central Bank’s expectations. The majority also expect the US federal funds rate to peak at between 5 percent and 5.25 percent, suggesting a quarter-point hike in the interest rate after the February move.
The European Central Bank raised interest rates by a total of 2.5 percentage points last year to combat rising prices, when inflation hit an all-time high of 10.6 percent in October.
Lagarde added that all major and core measures of inflation remain a concern for the central bank in Frankfurt. “Inflation is, by all accounts, very high,” she said.
Overall inflation has fallen in recent months, but the core measure – which excludes movements in food and energy prices and is seen as a better measure of underlying price pressures – rose in the year through December to 5.2 percent, from 5 percent previously. Month.
“It will take several months before core inflation falls to levels that make the ECB more comfortable,” said Frederic Ducrozet, chief economist at Pictet Wealth Management. “Nearly all ECB officials seem united in their fight against inflation, doves and hawks alike.”
Lagarde added that the flexible job market in the eurozone could lead to higher wages, unlike Brainard, who said that US wages “do not seem to be driving inflation in a 1970s-style wage-price spiral.”
Fed Chairman Jay Powell and other officials have expressed concern that service inflation, once costs related to food, energy and housing are removed, will keep broader price pressures above what is considered palatable and largely reflects a historically tight labor market.
Brainard said Thursday that these price pressures may in fact have been driven by supply-related disruptions and may not be “cyclically persistent.”
“It is still possible that continued moderation in aggregate demand would facilitate continued easing in the labor market and lower inflation without significant job loss,” she said.
Brainard noted that there is evidence that inflation is starting to subside and the economy is starting to cool. But she said businesses and households had yet to see the “full impact” of last year’s interest rate hike, when they raised the policy rate from nearly zero to more than 4 percent.