Divisions emerge over central bank policies
Divisions are beginning to emerge within the governing bodies of the world’s two major central banks, the European Central Bank and the US Federal Reserve, over the future direction of monetary policy.
The combined actions of the ECB and the Fed have injected trillions of dollars into the financial system since the pandemic began last year, but amid mounting signs of inflation and rampant material speculation raw materials and financial assets, one worries about where this is heading.
Long-standing differences within the ECB surfaced again this week as two prominent members of its governing body presented opposing assessments as to where the central bank should go.
On Monday, Fabio Panetta, a member of the ECB’s executive board, who is aligned with bank president Christine Lagarde, said monetary officials should retain the “unconventional flexibility” developed during the pandemic crisis and maintain interest rates low.
Dismissing the prospect of rising inflation in a speech to a conference of central bankers in Mediterranean countries, he said: “We do not seem to be on the right track to ‘make the economy run hot'” and that “the downturn in the economy was likely to remain significant for some time.”
Governments and the public, he continued, should recognize that current monetary and fiscal policies, aimed at providing a stimulus, were “clearly superior” to those in place before the pandemic when the focus was on reducing. debt.
His words echoed those of Lagarde who told EU leaders last week that they had to “water the green shoots” of economic recovery and that it was too early to start talking about ending it. central bank crisis measures.
In March 2020, the ECB launched a € 1.85 trillion emergency pandemic program to support financial markets and it still has just over € 700 billion to spend before it expires in March 2022.
Just hours after Panetta’s remarks, the head of the German Bundesbank, Jens Weidmann, put forward the opposite perspective in a speech.
Weidmann, who heads a group of Northern European representatives at the ECB who have criticized ultra-accommodative monetary policies, said there were “upside risks” to the inflation outlook and that the The central bank’s stimulus is expected to end “as soon as the emergency situation has been overcome” and 2022 will not warrant designation as a “crisis year”.
As the Financial Time noted: “His remarks created a clash with other members of the central bank’s governing council over the future direction of his policy.” The ECB is expected to announce the future direction of its policies in September.
Across the Atlantic, there are also signs of division within the Fed’s governing bodies over whether the current level of purchases of financial assets, which stands at 120 billion dollars per month, should be relaxed.
Despite predictions by some Fed members that interest rates should start rising in 2023, as opposed to previous forecasts of 2024, Fed Chairman Jerome Powell has insisted current policies will remain. in place until there is “further substantial progress” in achieving the goals. The Fed’s goals. He maintained that the surge in inflation, which saw prices rise 5% year-on-year in May after rising 4.2% in April, is “transient”.
But escalating US house prices have led some members of the Fed to demand that the purchase of mortgage-backed securities (MBS), amounting to $ 40 billion per month, should begin. to be canceled.
On Tuesday, it was revealed that house prices had risen by a record amount. The S&P CoreLogic Case Shiller National House Price Index, which measures house prices in major metropolitan areas, rose 14.6% in the year ending April, the most annual level of growth high since the index was launched in 1987. This follows a report from the National Association. of realtors that the median price of an existing home was up 23.6% in May from the previous year.
In an interview with the Financial Time Posted Monday, Eric Rosengren, Chairman of the Boston Fed, expressed concern about the implications of soaring house prices.
“It’s very important for us to get back to our inflation target of 2%, but the goal is for it to be sustainable. And for that to be sustainable, we can’t have a boom and bust in something like real estate.
The surge in house prices, which is reflected in Europe, as well as Australia, New Zealand and elsewhere, has been fueled to a large extent by the ultra-low interest policies of all central banks.
With the 2007-2008 subprime mortgage crisis no doubt in mind, Rosengren recalled that “boom and bust cycles in the real estate market have occurred repeatedly in the United States and around the world, and frequently. as a source of financial stability problems. “
Rosengren said when the purchase of securities is relaxed, mortgage-backed securities should be included in the reduction.
Others have gone further. Dallas Fed Chairman Robert Kaplan said MBS purchases should end “as soon as possible” due to the rising housing market, and St Louis Fed Chairman James Bullard also called on the Fed to reassess its housing support. market because of fears that a bubble is forming.
While Powell did not enter the debate, some of his supporters did. San Francisco Fed President Mary Daly told reporters that MBS purchases “did not directly affect” the interest paid on mortgages.
According to a report in the the Wall Street newspaper, Powell and other Fed officials are reluctant to specifically target the MBS market for reduced buying, as this would “suggest that the Fed is using monetary policy to address a concern about the stability of the financial system resulting from the rising house prices “.
In May, a key Powell supporter, New York Fed Chairman John Williams, pointed to the broader effects of the MBS program which had “quite powerful spillover effects on other financial conditions such as bond yields. ‘business and other types of similar titles’. He underscored this assessment in other comments last week that the Fed’s purchases of MBS are not “specifically tied to the housing market.”
Another aspect of the speculation sparked by the ultra-cheap monetary policies of the Fed and other central banks is evident in the commodities markets.
Bloomberg reported that its spot commodity index, covering 22 commodity processes, is up 78% from its March 2020 low. The price of oil is now $ 75 per barrel as forecast predict it could come back to $ 100.
Bloomberg reported that commodities traders who paid in money had been “doused” with money. Cargill, the world’s largest agricultural commodities trader “made more money in the first nine months of its fiscal year than in any full year in its history” with net income in excess of $ 4 billion of dollars. The Trafigura Group, a major oil trader, posted a net profit of $ 2 billion in its six months on the market, almost as much as in its previous best full year.
The main concern of central banks and governments around the world, as these price hikes are already translating into high consumer prices, is that inflation is fueling the working class campaign for higher wages. Therefore, while continuing to pump money into the coffers of financial elites and foster speculative bubbles, they will increasingly rely directly on union apparatuses to suppress this movement.