The Bank of Canada has taken the decision to immediately halt new bond purchases, while predicting a rate hike for the second or third quarter of next year.
Bank of England Governor Andrew Bailey said Britain’s central bank was ready to raise rates to combat inflation. The bank’s monetary policy committee meets this week and may give some indication of its intentions. The Reserve Bank of Australia has stopped defending the yield target on its government bonds, indicating that the central bank is abandoning quantitative easing in the face of inflation.
But the world’s two main central bankers, Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde, know better.
BOC enters 'reinvestment phase;' RBA could drop yield target this week
While the Fed is expected to announce the start of tapering at its policy meeting this week, Powell still thinks inflation will abate and the central bank won’t need to raise rates for a while. The ECB’s Lagarde said she doesn’t see any need for a rate hike before the end of 2022, though she conceded the governing council members talked a lot about inflation at their meeting last week.
The cold turkey announcement by the Canadian central bank that it would enter the “reinvestment phase” of its asset purchases—buying government bonds only to replace those maturing—came as a shock. While the statement from the governing council said there is still excess capacity requiring continued monetary policy support (read: interest rates at the lower bound), that situation may end in “the middle quarters of 2022.”
After the Australian central bank’s failure to halt the rise of the yield on the April 2024 bond at the target of 0.1%—the yield went as high 0.8% on Friday—investors now think it possible the RBA will formally drop the yield target at its board meeting this week. Its quarterly monetary policy statement is due out the end of this week.
Friday also brought the report on the US personal consumption expenditures price index, which registered its strongest year-on-year gain in 30 years, rising 4.4%. Even eliminating food and energy components—the so-called core index the Fed in its wisdom prefers to use—the gain was 3.6%, the highest since May 1991.
Biden Delays Fed Chair Nomination
Billionaire hedge fund manager Bill Ackman said last week he gave a presentation at the New York Fed, which executes the Fed’s monetary policy, and called for the central bank to begin tightening monetary policy “immediately,” not only by tapering asset purchases but by raising interest rates as soon as possible.
Meanwhile, President Joe Biden’s delay in nominating a chairman for the Fed is creating a leadership vacuum that is becoming more ominous literally by the day. That nomination has generally come in October for the term expiring in early February. Even Donald Trump made his announcement Nov. 2, so Biden is already later than usual, since he is unlikely to make any announcement before returning from his summits in Europe.
The longer the delay, the worse it looks for a second term for Powell as chairman. Whether Powell is renominated or Fed Governor Lael Brainard is named to succeed him, there is not likely to be any shift in monetary policy, but the wait is unsettling.
Especially given the uncertainty about how long inflation will continue to rise and just when the Fed will be called upon to act, the delay is beginning to undermine the credibility of an administration already weakened by sluggish action on its budget and the debacle of the Afghanistan withdrawal.
Powell is under fire from both the left and the right. Democratic Senator Elizabeth Warren has famously labeled him a “dangerous man” to head the central bank and explicitly said she will not support him for a second term. She thinks he goes too easy on banks.
Last week, Republican Senator Rick Scott, the former governor of Florida, said he will not support a second term for Powell unless he changes his current path of “foolishly ignoring rising inflation” and catering to the Democrats’ political agenda instead of the welfare of American families.
The two represent the opposing interests in Congress. It’s hard to see how Powell will be able to keep both of them happy.