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Powell preaches careful austerity

Picture of François Christen

François Christen

Chief Economist

Western central bankers seem prepared to sacrifice more growth to restore price stability.

Original article published in French on agefi.com

Jackson Hole and Nvidia have been the focus of considerable attention over the past week. The central bankers’ forum and the earnings results of the graphics processing unit (GPU) designer were presented as two major events likely to shake up the financial markets. In hindsight, investors gave a placid, almost indifferent welcome to Jerome Powell’s statements and Nvidia’s announcements.

Unsurprisingly, Jerome Powell’s speech hinted at the possibility of higher interest rates, while emphasizing the need for restraint in view of the “lags” that characterize monetary policy. The cautious message conveyed at the Jackson Hole symposium is compatible with a pause in September, followed by a final hike taking the key interest rate to a range between 5.5% and 5.75% during the fourth quarter.

The prospect of raising the inflation target, currently centered around 2%, was rejected by some. An opportunistic change in the rules of the game set by the Fed would have had significant effects on the dollar yield curve, but the central banker stressed his determination to maintain a restrictive course as long as inflation continues to evolve above an unchanged target. Although predictable, the austere tone of Jerome Powell’s speech pushed the yield on the 2-year T-Note above 5%, while exerting slight pressure on the yield on the 10-year T-Note, which fell back to around 4.2%.

As an appetizer, the PMIs released by S&P Global revealed a slowdown in activity in August (composite index down 50.4, versus 52 in July). Indicators due later this week (employment report and ISM manufacturing index) should catch the attention of central bankers and investors alike. Strong figures could tip the balance in favor of an increased rate hike, which is still far from unanimous. Conversely, weak figures would confirm investors’ skepticism regarding the Fed’s warnings.

Nvidia’s flamboyant results, hailed as a key indicator, did not have the effect expected by some US tech and Artificial Intelligence enthusiasts, even though they exceeded the expectations of analysts polled by Bloomberg and others.

In Europe, worrying economic developments prompted a decline across the euro yield curve. The yield on the 10-year German Bund dipped below 2.5% before rising again to around 2.6%. The erosion of PMIs and the deterioration of the business climate in Germany, as evidenced by the IFO index, should encourage the ECB to take a break in September until it has a clearer picture of inflation, which remains problematic despite the downturn encouraged by lower energy prices.

Like Jerome Powell, Christine Lagarde emphasized the need to re-establish price stability, which has not
yet been achieved despite the beneficial effects of lower energy prices. On both sides of the Atlantic, service
prices are still rising rapidly, and are still incompatible with central banks’ inflation targets.

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