Central bankers are invited to their annual pilgrimage to Jackson Hole, Wyoming, towards the end of the week. This meeting takes place against a backdrop of multiple crises causing the needle of the monetary tightening speed indicator to oscillate between inflation and recession, to the rhythm of a senseless Russian war in Ukraine, already too costly in social dramas , entering its seventh month.
A year ago, Federal Reserve (Fed) Chairman Jerome Powell still characterized inflationary pressures as transitory, reducing them to a year-over-year effect. He acknowledged, however, that “other constraints may continue to limit the speed with which supply can adjust”, increasing the possibility that “inflation will turn out to be higher and more persistent than we expect”. but while evoking the risks of premature monetary tightening. In its forecasts published in June 2021, the institution predicted 3.4% inflation in 2021, then a stabilization at 2.1% in 2022. A little later, it will admit to having underestimated the impact of the distortions on the supply chain.
Invasion
Then the invasion of Ukraine came. Evolving until then in a context of post-pandemic recovery, the economic situation has since changed completely, and the outlook has darkened. For its part, inflation in the United States only eased somewhat in July to reach 8.5% on an annual basis, after breaking a record high of more than 40 years in June, at 9. 1%. In the meantime, the Fed has raised its key rate four times since March to bring it closer to its so-called neutral rate (which neither stimulates nor slows the economy). And US GDP has entered recession by the classic definition.
Thus, two countries at war hosting an economy accumulating barely 2% of the world’s GDP will take away, in total, nearly 3% from world economic growth this year and next year. At least according to the July forecast of the International Monetary Fund (IMF), global GDP growth will be 3.2% this year and 2.9% in 2023 due to the disinflationary actions of banks. power stations. This is a downward revision of 1.2 percentage points and 1.5 points respectively from the January 2022 IMF update. That’s the equivalent of 1.2 trillion US dollars less GDP this year, some 1.5 trillion next year compared to forecasts before the invasion of Ukraine.
Despite the small size of their economies, Russia and Ukraine are heavyweights in the production of basic materials and energy, the prices of which have soared under the impetus of the Russian invasion.
Generalized stock market correction, inflation still in the stratosphere, Russian gas blackmail fueling an explosion in gas prices and an energy crisis in a European Union in the grip of a severe recession. Also, crisis and food shortages exacerbated by the historic drought on the Old Continent. And China’s real estate crisis, which comes on top of Beijing’s zero-COVID policy fueling supply chain distortions, the effect of which is amplified by high transport costs. Added to this is a US dollar galvanized by the Fed’s offensive which notably caused the euro to plunge below parity with the greenback on Monday, falling to its lowest level in nearly 20 years. In short, the menu of this high mass of central bankers taking place from Thursday to Saturday is rather rich in economic and geopolitical considerations.
No surprises expected
With these bankers having inflation and recession as a common enemy and risk, it seems “nobody is expecting any shocking revelations at this meeting,” Randy Frederick, vice president of trading, told Reuters. and derivatives for the Schwab Center for Financial Research. “Everyone is pretty much on the same wavelength: we are in a tightening process, this process will probably slow down gradually. »
Reuters adds that on average, speeches by Fed chairs in Jackson Hole do not move the markets in a noticeable way. The S&P has only posted one rise of around 1% in recent years after the Fed Chairman’s keynote speech. That of 2019, however, caused a noteworthy drop of 2.6% in the Wall Street benchmark. A proponent of a defensive or preemptive target rate hike, Jerome Powell found himself grappling with opposition from President Donald Trump campaigning for lower interest rates to further stimulate economic activity. in the USA.
But the central bankers will have to say and convince that they are not overtaken by events. Furthermore, “there should be a lot of discussion about whether or not there has been major credibility damage” with this inflation path error, and “what can be done to fix it,” Carola Binder, who teaches economics at Haverford College, Pennsylvania, told Agence France-Presse.