Interest-Rate Cuts Rely on Inconvenient Truths About Inflation
Central bankers no longer want to be held hostage by every piece of price data when they need to get on with cutting interest rates.
Christine Lagarde, president of the European Central Bank, from left, Kazuo Ueda, governor of the Bank of Japan, and Jerome Powell, chairman of the US Federal Reserve, will be returning to Jackson Hole, Wyoming, next week in their search of a path to sustainable economic growth.
Photographer: Bloomberg/BloombergThe tricky last yards of closing in on — and then maintaining — the hallowed 2% inflation target that all the major central banks adhere to requires a change of tactics. Over the past two years, a mantra of economic data-dependency has been drummed into us, keeping interest rates higher for longer. This ethos is in danger of becoming, well, a bit inconvenient as the mood swings toward rate cuts.
July US and UK consumer price inflation numbers this week are both expected to tick up. That risks muddling carefully crafted central bank messaging that restrictive monetary policy is coming to an end. The Federal Reserve is widely expected next month to follow the European Central Bank and Bank of England, which have already taken the first steps in lowering rates. But as Bloomberg's Chief UK Economist Dan Hanson pithily puts it: "The optics of easing policy when inflation is on the rise aren’t favorable."