NEXT WEEK AND ITS POTENTIAL RESIGNATION IN CENTRALBANKS
Are Centralbanks ("CB") flirting with another round of rate hikes?
A second round response to second round wage settings and sticky outcomes of realized inflation globally ?
PhD's in the big CB's are working hard these days to identify what exactly the first forund of hike have achieved.
Because one thing is to shine on the rapidly imploded headline energy-food inflation, another thing is the core. The super sticky and tricky core.
However, just before we turn into that, CB analysts will most likely find it very hard to even relate 14-months of restrictive monetary policy with the policy bouyant headline outcome.
Why? Simply due to the high risk of spuriousity. What the heck does that even mean? Its means just because you can draw a chart over 14 months of seemingly well correlated realized observations of 2 variables, Fed funds DRAMATICALLY UP and headline inflation DRAMATICALLY DOWN, it by no means imply they ARE correlated.
And indeed there is a fat fat chance of this fancy spuriousity and hence also the current market-implied CB policy conviction.
Let me be clear. For there to be a logical reason of CB's in control of inflation we need a reason. Not a chart. And the most obvious reason is not there. At least not the one CB's themselves have founded models, policy, and even recent communication on.
The global tigtening rate cycle was initiated and explained with reference to a policy transmission mechanism through the hot-boiling labour markets.
Disinflationary forces was expected to be achieved by (controlled) cooling of labour markets with policy rates and base liquidity QT.
A classical AND mainstream New-Keynesian approach. Fed chairman J. Powell as such predicted US need an unemployment of 6,5% to achieve the inflation goal. Today it's 3,7% and 14 months ago it was 3,6%!
Global labours are still boiling hot, and in the context of CB philosophy and models, the economy is leaning towards an uncomfortable and steep asymmetric inflation reaction.
This MUST be a concern. Policy has NOT worked by the targeted labour market stepping stone.
If we look at the chart it becomes to some extent very obvious that the real rate formation just continues ploughing down.
From US 10 year Gov rate to BAA Corporate via 30Y Mortgage rates.
All are zero to negative. Yes, on realized inflation just as all other points in the chart that also included mismatch between expectation and realisation.
But this is the reality. Here and now.
Negative real rates, boiling labour markets and some would add financial markets too.
To conclude and in my personal view:
CB's cannot successfully and timely, unanchor core disinflationary forces with changes in short nominal rates UNLESS they ARE ALLOWED to work through the most sensitive nominal rate sector in the economy.
The banks. Credits.
In order words. As long as the State heals bleedings in the financial system, it not only risk taxpayer nominal money but also real money. Sticky core Inflation cannot be expected to drop forcefully when credit impulses are targeted only from the demand side and not from the more sensitive supply side.
For now the natural real rate is much higher than 0%. To address current overheating, rates must go much higher all the way out. Or, use the credit supply channel with lower rate hikes and no backstop.
BIG DESICION with huge potential policy errors. On both sides.