Balazs Koranyi and Howard Schneider
Jackson Hole, Wyoming. (Reuters) – The message from the world’s top treasurers was loud and clear: Rampant inflation will continue and it will take extraordinary efforts to curb it, most likely a recession with job losses and shock waves engulfing emerging markets.
However, the price is still worth paying. Central banks have spent decades building credibility on inflation-fighting skills, and losing the battle could shake the foundations of modern monetary policy.
“Restoring and maintaining trust requires us to bring inflation back to target quickly,” said Isabel Schnabel, a member of the European Central Bank’s board of directors. “The longer inflation remains high, the greater the risk that the public will lose confidence in our resolve and ability to maintain purchasing power.”
Even as economic growth suffers and people start to act, banks should continue to operate. lose their jobs.
“Even if we enter a recession, we basically have no choice but to continue on our policy path,” Schnabel said. “If inflation expectations fall, the impact on the economy will be more severe.”
Inflation in many of the world’s largest economies is near double digits, a level the world has never seen before half a century. Aside from the U.S., the peak is still months away.
Complicating matters, central banks appear to have limited control in most cases.
On the one hand, high energy prices, the result of Russia’s war in Ukraine, are creating a supply shock that monetary policy has little effect on.
Massive spending by the government, also outside the control of the central bank, exacerbates the problem. A study published in Jackson Hole argues that half of inflation in the United States is driven by finances, and the Federal Reserve will not be able to control prices without government cooperation.
Finally, there may be a new inflation mechanism that will keep upside prices under pressure for a long time.
Deglobalization, alliance restructuring due to the Russian war, demographic shifts and more expensive production in emerging markets are all likely to make supply constraints more persistent.
” Agustín Carstens, president of the Bank for International Settlements in the global economy, said: “It appears to be on the cusp of a historic change, as many of the aggregate supply tailwinds that dampen inflation appear set to change. into a headwind. “
“If so, the recent pick-up in inflationary pressures may be more persistent,” said Carstens, who leads an organization commonly known as the central bank of the world’s central banks.
All of this shows that, led by the Fed, the ECB is working hard to catch up with interest rates and raise them over the next few years.
Emerging Markets
The pain of high U.S. interest rates will extend well beyond the national economy and hit emerging markets hard, especially if high interest rates prove to be as persistent as Powell now suggests.
“This is a critical time for the Fed,” said Peter Blair Henry, professor and dean emeritus of the NYU Stern School of Business.
“Past 40 years’ credibility is at stake, so they’ll lower inflation anyway, including if that means collateral damage to the emerging world. “
Many emerging market countries borrowed dollars, and the Fed rate hike hit them on multiple fronts.
It pushed up borrowing costs and raised debt sustainability issues .It also sends liquidity to U.S. markets, pushing up emerging market risk premia and making borrowing more difficult.
Finally, the dollar will continue to strengthen against most currencies, pushing up emerging market imports Inflation.
Big countries like China and India seem isolated, but many smaller countries from Turkey to Argentina are clearly suffering.
“We have some special are frontier economies and low-income countries whose spreads have widened to what we call distressed or near distressed levels, so 700 basis points point to 1000 basis points,” said IMF Chief Economist Pierre-Olivier Gourinchas.
“There are many countries, it’s about 60% lower Income countries, we have about 40 emerging and frontier economies that are struggling,” he said. “They still have market access, but borrowing conditions have definitely deteriorated a lot. . “
Monitors at S&P Global (NYSE: SPGI) now see lenders in South Africa, Argentina and Turkey as very risky or very risky financing High. It also believes that in many countries, including China, India and Indonesia, the credit risk of financial companies is very high or extremely high.
“There are Some Cornell economics professors, Eswar Prasad, said frontier economies such as Sri Lanka and Turkey would be hit hard if the Fed raises rates and rates remain high.
“Two to three years will start to make things difficult … If the Fed is going to keep rates high for an extended period of time, the pressure could hit immediately,” said Pop Rassad added.
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