To a large extent, it was more of the same on Tuesday. The Federal Reserve chairman delivered his speech, nobody was surprised, and currency movements were mostly small. Sterling brought nothing to the party and was unchanged on average.
Six weeks after Jerome Powell abandoned the description of inflation as “transitory”, he completed the reversal of the Fed’s monetary policy guidance. In his presentation to the Senate Banking Committee yesterday, the chairman said, among other things, that asset purchases will end in March and interest rates are likely to rise “over the course of the year”. He went on to say that “at some point perhaps later this year we will start to allow the balance sheet to run off”. In other words, he is preparing to reverse the asset purchase programme, probably not by offloading the assets into the market, but by allowing them to mature instead of repurchasing them.
There was a brief wobble for equity prices, but investors were basically satisfied that Dr Powell had said what he had said he was going to say, with no unpleasant hidden surprises. The USD actually weakened, probably also because the Fed seemed to be moving along the promised course. The USD is an average of 0.4% lower, with losses of half a cent to the GBP and a proportionally-similar third of a cent to the EUR.
New Buba broom
Having thrown in the towel at the end of last year, Jens Weidmann congratulated his successor Joachim Nagel on his appointment as president of the Bundesbank. For his part, Dr Nagel pledged to continue the fight against inflation, and the pursuit of financial stability. European Central Bank President Christine Lagarde also spoke in favour of price stability.
It was rather too early in Dr Nagel’s appointment for him to labour the point, but it is likely that his position on inflation is closer to that of the hawkish Dr Weidmann than of Ms Lagarde. Officially, at least, she supports ECB Chief Economist Philip Lane’s dovish view that inflation is transitory enough not to need central bank interference. Nevertheless, there were kind words all round and the euro is unchanged on the day against the GBP, CHF, AUD and NZD.
For a second day, the central bankers overshadowed the economic statistics. There were no ecostats at all from Europe and only the NFIB small business optimism index from the United States. The index improved slightly in December or, as Reuters put it, “turned less sour”.
Wednesday began with the Chinese inflation data and will move on this afternoon to the rather weightier US inflation figures. Inflation slowed in China in December; it is likely to have risen in the States.
At 1.5%, the headline rate of Chinese inflation was well down from the previous month’s 2.3%, but within the range that contained it for the eight years prior to the Covid pandemic. There was also a slowdown in factory gate price inflation. The 10.3% annual rise in the producer price index was two and a half percentage point lower on the month, though still well above its pre-pandemic range.
The other competitor in today’s two-horse ecostat race is US inflation. There is every chance that it will reach a new 40-year high, with analysts estimating a headline rate of 7%. A big number would reinforce expectations of an early Fed tightening move.