Central Banks Are Being Caught off Guard by an Economic Tsunami

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The roaring economic recoveries that followed the pandemic’s first year slowed due to supply-chain issues. The world machine is far too large and complex to restart operations in a matter of months. Slowing growth was also an unexpected occurrence. To top it all off, Russia decided to invade Ukraine, while the rest of the world imposed economic sanctions on Moscow and its allies. The economic crisis has gotten out of hand. Politicians and central bankers are well aware of the situation and are doing what they can, which, by the way, is far from enough to keep the financial ship afloat.

Raising interest rates will help to cool price pressures, but will have an impact on consumption, resulting in slower economic growth. The new words that govern market behavior are recession and stagflation.

People, not markets, stand in the way, but policymakers, regardless of what they say, do not prioritize this. Expensive energy, food prices, and scarcity have reached alarming levels, and monetary policy measures are doing little to control them.

Central bankers are turning a blind eye

Furthermore, US Federal Reserve Chair Jerome Powell was unequivocal about the Fed’s inability to lower some prices. Powell testified before Congress on Monetary Policy and the State of the Economy, noting that the Fed has little control over energy and food prices, though he reiterated the Fed’s unwavering commitment to fighting inflation. Finally, the central bank’s chairman stated that lowering inflation without affecting the labor market is “significantly more difficult.” Nonetheless, the Fed is content with the current rate hike pace, and markets anticipate another 75 basis point hike in July, followed by a series of at least 50 basis point hikes. Policymakers in the United States are steadfast in their aggressive stance.

The European Central Bank, on the other hand, is among the most cautious. Most major central banks have raised interest rates more than once, but the ECB intends to raise rates by 25 basis points in July. Nonetheless, European moderation performs no better than US aggression. The Union’s situation is expected to worsen as a result of tensions with Russia and a lack of energy resources.

German Economy Minister Robert Habeck announced that the country would move to the second stage of its three-stage gas plan due to reduced Russian flows. Fuel shortages have been Europe’s main concern since the start of the war in Ukraine. This stage does not imply state intervention, but the country is getting close.

Inflation and growth will remain in the eye of the storm

Against this backdrop, it appears unlikely that the shared currency will gain sustained bullish momentum. The FX board reflects more of the dollar’s dynamics at a given time and with a given sentiment than euro-side factors.

Inflationary figures continued to indicate price pressures, while growth figures indicated a slowing of progress. The German Producer Price Index increased by 33.6 percent year on year in May, while the flash S&P Global PMIs indicated a sharp slowdown in business activity in the US and the EU at the end of the second quarter.

The following week will likely include some relevant data that will paint the same economic picture. The US will release May Durable Goods Orders on Monday, which are expected to be up 0.1 percent MoM. Germany will release preliminary estimates of the June Consumer Price Index on Wednesday, while the United States will release the final estimate of the Q1 Gross Domestic Product. Germany will release May Retail Sales, while the US will follow with core PCE inflation figures and the EU will provide preliminary estimates of June inflation data. Finally, ECB President Christine Lagarde will be making headlines all week.

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