Sintra: Data, Debt, and Disinflation
Fed Chair Jerome Powell and ECB President Christine Lagarde yesterday shared insights on monetary policy and economic outlook during the ECB Forum, in Sintra.
Powell emphasised that the Fed has made significant progress on inflation, noting that recent data suggests a return to a disinflationary path. He expressed satisfaction with the current economic situation, citing 4% unemployment, 2% growth, and gradual cooling in both the economy and labour market.
Regarding future policy decisions, Powell stressed the importance of balancing risks. He indicated that the Fed can be patient with rate cuts due to the strong labour market, stating, "We have the ability to take our time." Powell expects inflation to be in the "mid- to low 2s" in a year, which he described as "a great outcome."
On the labour market, Powell noted that wages have been cooling off slowly, aligning with the Fed's goals. He expressed contentment with the current unemployment rate, hoping it would remain stable over the next year. However, recent JOLT job openings data for May came in higher than expected, underscoring the Fed's cautious approach to rate cuts. We will see what the employment report on Friday brings.
We recently wrote about the ballooning US deficit (Economic Challenges Loom as 2024 Unfolds) and the potential economic consequences. Powell addressed his concerns about long-term issues, warning that US debt growth is on an unsustainable path. He urged action sooner rather than later to address the large deficit, especially given the low unemployment rate.
Lagarde, speaking before Powell, focused on the ECB's progress in disinflation while acknowledging persistent uncertainties. She projected inflation to be in the "low twos" within a year. Lagarde also expressed concern over the recent surge in trade protection measures, noting their potential impact on European innovation and productivity.
Both central bankers emphasised the importance of data-dependent decision-making. Powell stated that the Fed wants to see "more data like what we have seen recently" before considering rate cuts. Similarly, Lagarde refrained from commenting on future ECB rate paths, citing the commitment to data dependency.
Notably, Powell downplayed the significance of academic discussions about the neutral interest rate (R*) on real-time policy decisions. He also dismissed concerns about potential threats to central bank independence from political figures.
In summary, both Powell and Lagarde presented cautiously optimistic views on their respective economies' progress towards target inflation rates, while emphasising the need for continued vigilance and data-driven decision-making in monetary policy.
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