Monetary policy is currently operating at three speeds. The highest gear is being driven by the Bank of England, which on Thursday raised its key rate by a quarter-point for the second meeting in a row, narrowly avoiding a half-point hike as four of the nine members on its Monetary Policy Committee voted for the bigger increase.
Second-highest is the US Federal Reserve, which has pledged to start raising rates next month when it ends its program of asset purchases and plans to stop reinvesting maturing bonds later this year.
Bringing up the rear in the lowest gear is the European Central Bank, where President Christine Lagarde has finally given up her stubborn resistance to fighting inflation and opened the door to a rate increase sometime, maybe, this year.
Meanwhile, inflation surges on. In the UK, year-on-year inflation hit 5.4% in December, the highest rate in nearly 30 years and the Bank of England now forecasts a peak of 7.25% in April. The central bank also said it will start running off its bond portfolio next month, and stop reinvesting a portion of its £875 billion (US$1.18 trillion) in holdings.
In the eurozone, inflation hit 5.1% on the year in January, a new record high for the currency bloc, compared with 5% in the previous month, and consensus forecasts of just 4.4% for January. ECB President Christine Lagarde acknowledged the inflation risk at her press conference after the policy meeting Thursday:
“Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher.”
Harvard economist Larry Summers was back thumping his inflation drum last week, praising the Fed’s policy pivot to combat price increases but warning it is still going too slow. In a Q&A with The Harvard Gazette, Summers said:
“I think the longer we delay in being clear and strong with respect to inflation, the more costly it ultimately will be to wring inflation out of the system. We may have to deal with higher inflation the longer we delay, and we may have to deal with more entrenched inflation expectations the longer we delay.”
Quarter-point rate hikes just won’t get the job done, according to the former Treasury secretary. Acknowledging the current situation is unprecedented and it’s hard to know exactly how to proceed, he added: “Historically, it has been necessary to raise interest rates by several hundred basis points—several percentage points—in order to meaningfully reduce inflation."
Fed Speakers Push Back On Half-Point Hike
Fed policymakers, meanwhile, are trying to silence the buzz about a half-point hike in March. Philadelphia Fed chief Patrick Harker said he is not convinced a 50-basis point hike is called for. To justify that big an increase, he said on Bloomberg Television it would take “a fairly significant spike, from where we are now, on inflation.”
Mary Daly, head of the San Francisco Fed, said she would support a quarter-point hike in March, but any subsequent action would have to wait on data. She is in favor of a gradual pace of tightening to avoid derailing the US economy.
Atlanta Fed chief Raphael Bostic quickly backtracked from his remarks about a half-point hike being an option, clarifying that is not his “preferred setting of policy action at the next meeting.” His baseline is still three quarter-point hikes this year, he said in an interview with Yahoo (NASDAQ:AABA) Finance.
They may change their tune when the consumer price index comes out on Thursday as median forecasts put the year-on-year increase in the overall rate at 7.3% in January, with core CPI, excluding food and energy costs, at a still heady 5.9%.
Michelle Bowman is the only member of the Washington-based board of governors scheduled to speak this week as the Senate Banking Committee won’t vote on Chairman Jerome Powell’s nomination to a second term and Lael Brainard’s promotion to vice chairman until Feb. 15.
Committee Chairman Sherrod Brown has also scheduled the votes for three new members of the board for that day, though the full Senate must then approve the nominees if they are voted out of committee.