Eager to get a clearer picture of when central banks will begin tapering stimulus measures, markets these days pay very close attention to anything the Chairman of the Federal Reserve says in public and Jerome Powell’s testimony to Congress last week was no different. Consensus pre-statement was that economic growth is strong, inflation is transitory, and the Fed will be slow to wind-up stimulus.
Chairman Powell offered strong confirmation of this view last week, saying that the current spike in inflation was being caused by “extremely strong demand for labour, goods, and services” which a “flatfooted” supply side was failing to meet. He added that the central bank had no plans to raise rates pre-emptively, and that it would wait for evidence of inflation “or other imbalances” before acting.
He also said that faster-than-expected progress was being made towards the Fed’s employment and inflation targets and a sharp rebound in economic growth has caused the Fed to raise its GDP outlook for 2021. The US central bank now sees real GDP growth hitting +7% this year, then +3.3% next year. The Fed now believes consumer price inflation will rise +3.4% in 2021, then steady out at +2.1% in 2022, and +2.2% in 2023, as supply-side bottlenecks ease over time.
Eurozone inflation rose above the ECB’s 2% target in May, following the pattern seen in the US of rising consumer and producer price inflation as the economy recovers. The European Central Bank considers this inflationary pressure to be transitory (much like the US Fed), but some market participants are questioning how long the ECB will continue providing monetary stimulus in the face of rising inflation. Europe is, arguably, more averse to inflation risks given its history. The ECB has stated it is in no hurry to taper stimulus measures, as there will not be enough data by September to “decide the future” of its pandemic emergency purchase programme (PEPP). In other words, we can expect the ECB to continue its €1.85 trillion bond-buying (monetary stimulus) initiative for at least the near future.
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