In year-end meetings, top central banks can distinguish from each other on inflation, Omicron

FILE PHOTO: Federal Reserve building in Washington, DC
FILE PHOTO: The Federal Reserve Building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo

December 14, 2021

By Howard Schneider and William Schomberg

(Reuters) – Major central banks meet this week to assess risks from the new Omicron variant of the coronavirus even as they consider reducing emergency measures imposed nearly two years ago to combat the damage economy of the pandemic.

The Global Balance Act begins on Tuesday when the Federal Reserve convenes its most recent two-day meeting and includes new monetary policy statements from the US central bank on Wednesday, European Central Bank and Bank of England on Thursday, and Bank of Japan. on Friday.

All are facing some version of the same dilemma – whether the need to protect against inflation and end the current era of low interest rates and central bank asset purchases is urgent. than the economic threat posed by the new variant – but their different approaches could result in a volatile year.

Inflation, the labor market and the link between the virus and economic performance are performing differently across major economies, creating a potential divide over how central banks will manage the coming period. of the pandemic. That contrasts with the wave of synchronous and massive support that was passed at the outset of the health crisis in the spring of 2020.

The Bank of England appeared to be on track to raise interest rates recently due to high inflation, but policymakers were baffled by the rapid spread of Omicron and the imposition of new restrictions in the country. . They are now expected to keep a cap on borrowing costs at their meeting this week as a reminder of the decisive role the pandemic still plays.

Michael Saunders, one of two Bank of England policymakers who voted for a rate hike in November, said earlier this month that “there could be concrete advantages to waiting to see more degrees”. evidence of the possible impact of (Omicron) on public health outcomes and therefore the economy.” Since then, the risks of this variation to the UK economy have grown.

The ECB is likely to go ahead, and the Bank of Japan is likely to begin, reducing some of its pandemic bond purchases by a margin, steps expected to reflect lower inflation and an economic recovery. economic performance is less positive in the euro area and Japan. A rate hike for both is likely a long way off.

In the case of the ECB, it must also take into account the vast differences within the bloc it sets policy on. For instance, any major pullback from crisis support could have unintended consequences for the sustainability of debt burdens in economies like Italy.

For Japan, the inflation that is ripping off other parts of the world remains mostly absent. Therefore, the purchase of corporate assets only slightly decreased under discussion.

Meanwhile, the Fed is likely to intensify policy change that could grow even stronger next year, and that arguably poses the biggest risk of a disruptive surprise.

The US central bank is dealing with inflation already well above its official 2% target and persistent enough for policymakers to dismiss their description of it as “transient”. While the US labor market is still several million jobs short of its pre-pandemic peak, low unemployment and rising wages could signal that full employment is approaching. (Figure: Inflation, Average Inflation,


Gian Maria Milesi-Ferretti said: “Nearly two years after a pandemic left economic forecasts unresolved, uncertainty remains high, with the fate of global financial markets tied to problems. seems localized as to whether more people are starting to look for work in the United States, said Gian Maria Milesi-Ferretti. , a former associate director of research at the International Monetary Fund and now a senior fellow at the Brookings Institution’s Hutchins Center for Monetary and Financial Policy.

If U.S. labor force participation remains stagnant and policymakers conclude they have reached full employment, “maybe the Fed will have to tighten more quickly” predicted, disrupting markets. world asset markets and especially for developing countries, where the cost of dollars rises painfully, he said. (Image: Lots of fuel, but no lift,

The Fed this week is expected to accelerate the end of its monthly bond purchases for Treasuries and mortgage-backed securities so that the bond-buying program ends in March instead of June. But that decision may provide less signal of what’s to come than how the Fed’s new policy statement describes US inflation, how officials change their forecasts for interest rates and economy, and in the tone that Fed Chairman Jerome Powell delivered after the meeting. news conference.

The Fed chief faces the same unknowns as his peers: Will the new variant continue to upend global supply chains and drive inflation? Destroying consumer spending and jobs in a new recession? All of the above? Or will it have little or no economic impact?

Investors had been expecting the Fed to pass three rate hikes by 0.25 percentage points in 2022. Those bets have only increased since the Omicron identification last month, the evidence suggests politics. and the economy due to high inflation in the US is currently having a heavier impact than the economy’s perception. new outbreaks.

At their September policy meeting, Fed officials were evenly split on whether even one rate hike is needed next year. With the unemployment rate improving faster and inflation higher than officials forecast at that meeting, analysts say officials now have to catch up on both the economic outlook and the projected path forward. opinion of interest rates.

“It’s clear that Omicron has introduced some uncertainty” into the Fed’s calculations, said Jay Bryson, chief economist at Wells Fargo. Bryson expects inflation to ease by mid-2022, allowing the Fed to wait until the second half of the year to raise its benchmark rate overnight and end the year with two 0.25 percentage point rate hikes.

But “if we’re wrong, the Fed is going to have to step it up,” Bryson said, “and if they go very fast, that’s when you make a policy mistake.” (Image: A bumpy landing?,

(Additional reporting by Leika Kihara in Tokyo and Balazs Koranyi in Frankfurt; Editing by Dan Burns and Paul Simao) In year-end meetings, top central banks can distinguish from each other on inflation, Omicron

Bobby Allyn

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