Barrons.com
The current global supply chain disruptions have become the best illustration of the conundrum that central bankers are facing today. Whether they are caused by the closure of a Chinese container port, the shortage of semiconductors, extreme weather events, or the lack of truck drivers in the U.K. due to Brexit, they contribute to slow the global economic recovery down. But at the same time, they cause prices to rise, as shown by this year’s inflation spike.
What would be an anomaly in usual times – less growth with more inflation – may become the norm this year. So should central bankers worry first about higher prices or about slower growth? The Federal Reserve, the European Central Bank (ECB) and the Bank of England are faced with the same problem, even though details and timing differ, reflecting some structural differences between their respective economies.
Market operators and investors have the same economic information as central bankers. But on top of the uncertainty of data, they have to second-guess what the latter are likely to do. This week, they hope that a speech by Fed president Jerome Powell at the virtual Jackson Hole seminar Friday will provide clues as to when and how the U.S. central bank will start phasing out its asset-buying program.
They may get some clarity, or maybe they will not. The open and very public debates between hawks and doves among central bankers the world over are at least a sign that the current, uncertain situation can be interpreted in many different ways.
And the Delta variant does not help. Households and businesses are sending conflicting signals about its expected economic impact, and as Powell noted in a recent speech, it is hard to draw a firm conclusion from the last two years’ pandemic experience.
Maybe the new variant will have a lesser impact on the recovery, because people, companies and governments have learned to adjust, and changed their behavior. Furthermore, “with so much structural change, statistics may miss new economic activity,” noted UBS chief economist Paul Donovan.
Another source of uncertainty comes from governments’ action. A major boost to the U.S., and beyond that, the global economy, could come from the massive stimulus package currently discussed by the Democratic majority in the U.S. Congress. But that will depend on the size and shape of the actual plan, whenever it is adopted.
For the moment they still see this year’s inflation as a temporary phenomenon. But prices are up 5.4% in the U.S. from a year earlier. They are expected to rise by up to 4% later this year in the U.K. according to the Bank of England. Inflation is not as high in Europe, expected to peak at 2.6% in the last quarter, but that is because the eurozone had spend almost a decade trying to avoid deflation before the pandemic struck.
Temporary factors are at work – energy prices shot up in the last year after reaching decade lows during the pandemic, bottlenecks abound, consumers enjoyed spending this Spring after months of forced savings. But central banks must now decide how long this temporary should last.
All of them have indicated that the recovery should come first. The Fed and the BoE also keep an eye on job numbers, but fighting unemployment is not formally in the ECB’s remit. For the three big central banks, the only certainty is that the massive bond-buying programs devised to fight the pandemic will have to be unwound. But for the moment, they are still looking for data that would confirm that the recovery is here to last.
READ MORE at Barrons.com
