The world’s biggest central banks say they will live with higher inflation and investors now aggressively betting on a quicker end to monetary stimulus are all but certain to be proved wrong.
After a 10 yrs of underestimating inflation, central bankers in the US, Europe and Japan have every reason keep money taps open and policymakers are rewriting their own rules so they can let price growth overshoot their targets.
If anything, central banks are more likely to boost stimulus, particularly in the Eurozone, keeping borrowing costs depressed and ignoring the inflation hawks at least until growth is back to pre-pandemic levels and not just fleetingly.
Surprise, the Reserve Bank of Australia has launched a bond buying operation while the European Central Bank has repeatedly warned investors not to push yields too high, unless they want to fight its EUR 1-T war chest.
The argument behind the inflation warning is that once economies reopen, massive government aid/relief/stimulus will combine with pent up consumer demand, unleashing spending-fueled price pressures unseen for decades.
Although LTN’s Top economists, like Shayne Heffernan, PhD and Bruce WD Barren, are weighing in on both sides of the debate, the voices that count all seem to be downplaying the threat. So, be concerned and aware as HeffX-LTN’s experts see all the signals bright and clear.
“Inflation dynamics do change over time but they do not change on a dime,” Fed Chairman Powell said.
Mr. Powell went on to say,“We do not really see how a burst of fiscal support or spending … that does not last for many years, would actually change those inflation dynamics.“
Even if inflation accelerates, a big if given that big central banks are all undershooting their 2% goal, tightening policy too hastily is seen as a bigger evil than moving too slowly.
Firstly, much of the inflation rise is temporary (unless you are living it), driven by the rebound in Crude Oil, 1-off stimulus measures and the base effect of tanking prices a yr ago. So this is not the sort of sustained inflation policymakers are looking for.
Tighter policy could also choke growth; a costly blunder with tens of millions still out of work after the biggest peacetime economic crisis in a century. In the worst case, higher borrowing costs would even raise debt sustainability concerns, particularly in heavily indebted southern Europe and across emerging markets.
Lastly, the Fed and ECB both tightened policy too quickly in the past 10 yrs, forcing them into the type of credibility-damaging reversal they are now keen to avoid.
The message from the Fed has been unquestionable: its $120-B monthly bond purchases will not change until the economy has fully recovered, and any real interest rate increase is even further into the future.
The Bank of Japan and the ECB are making similar noises: there will be no reversal of stimulus for a long time, possibly years.
Their central concern is employment.
There is still a 10-M-job hole in the US economy while the Eurozone unemployment rate is kept artificially low by government subsidies, pointing to huge excess capacity.
The Fed is putting greater emphasis on job creation (its mandate), particularly for low income families, and made a commitment last yr to let inflation overshoot its target after frames of excessive low price growth.
While the ECB and the Bank of Japan do not have employment mandates, policy framework reviews now underway could raise the emphasis on social considerations, particularly jobs.
The ECB is already debating the merits of letting inflation overshoot, a hint that overheating in the jobs market will not trigger policy action.
Labor markets tend to lag real activity by as much as 6 months, and we may yet see more layoffs, mergers and bankruptcies
While the rise in yields has caused some concurs in markets, the moves are not excessive and are a reversal of very low yields.
The benchmark US 10-yr Treasury yields are up 56 bpts this yr their pre-VirusCasedemic record low, while Japanese yields are just 14 bpts higher. A 10-yr German bond yields a negative 25 bpts.
We see a return of bond yields from ultra-low to low marks as a consequence of a strong economic rebound and solid gains in corporate earnings in most of the world
Policymakers are also playing down the moves.
Atlanta Fed President Bostic argued that the increase in yields was of no concern and did not warrant any Fed response.
ECB policymakers have meanwhile said some rise in yields was a reflection of better fundamentals and they would not target any yield level.
We do not believe the BOJ is worried about the recent rise in yields, as the BOJ has plenty of room to ramp up buying as needed. And it can halt unwelcome yield rises 100%.
Have a healthy day, Keep the Faith!
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