Every year, I get heavily involved in the party conference season, speaking at fringe meetings, gossiping with MPs and ministers and generally indulging my appetite for political intrigue.
Then, having made my annual visit to the ‘Westminster bubble’ – albeit away from Westminster – I feel an overwhelming urge to restate what I see as a universal truth.
What should we make of this latest rise in UK inflation? Is it because of Brexit? And are interest rates now set to rise for the first time in almost a decade?
This was a sharp inflation increase. In February, the consumer price index was 2.3pc higher than in the same month in 2016, compared to a 1.8pc annual increase the month before. Less than six months ago, in October 2016, annual CPI inflation was remarkably subdued, at 0.9pc. Now UK inflation has shot above the Bank of England’s 2pc target for the first time since 2013.
“I am not going to offer the incoming president advice about how to conduct himself”. So said Federal Reserve boss Janet Yellen last week, as the US central bank raised interest rates for only the second time in a decade.
The rate increase, in and of itself, wasn’t surprising. For months, various members of the Fed’s policy-making board have been publicly stating that higher rates were in the works. Still, despite the “quarter point” hike from 0.5pc to 0.75pc being “baked into” asset prices ahead of Wednesday’s announcement, the market reaction has been quite volatile.
The media hype surrounding any US Presidential election campaign doesn’t, in general, encourage serious economic analysis. The astonishing psychodrama of this epic 2016 contest – which reached a new peak, perhaps, during last week’s final television debate – is drowning out almost any meaningful narrative regarding the state of the US economy.
The world is fixated, of course, on the brutal battle between Donald Trump and Hillary Clinton. This marathon race for the White House, between two incredibly divisive candidates, has cut fissures across the American electorate far deeper than those that have long existed. And there’s still over two weeks to go.
So, the Federal Reserve finally did it. I half-suspected Janet Yellen would find yet another excuse not to raise interest rates last week. But the Chair of the world’s most important central bank made her move, with the Fed’s Open Market Committee coming to a unanimous decision.
For the first time in almost a decade, US policymakers put up the “Fed Funds rate”. Having been steadily cut from late 2007, as the ghastly sub-prime crisis loomed into view, then dramatically slashed to historic lows after the Lehman Brothers collapse a year later, America’s benchmark price of money has sat at 0-0.25pc for an incredible seven years.
Back in mid-July, there was much febrile speculation UK interest rates would finally start rising before the end of this year. Amidst signs of stronger US growth, and predictions the Federal Reserve would raise borrowing costs over the next few months, it was widely assumed the Bank of England would follow suit.
Last Thursday, though, as the UK base rate remained at 0.5pc for the seventy-eighth successive month, speculation of a pre-year-end rate rise dissolved, as some of us predicted. Most analysts now forecast, once again, the Bank of England won’t make a move before March 2016.
Is the oil price crash over? In mid-February, Brent crude traded at $63 a barrel, up from a $45 low a month earlier. Does that sharp rise mean oil will now climb steadily back above $100? Triple-digit oil prices, after all, have become the normal in recent years. The black stuff spiralled to almost $150 in late 2008, ahead of the global financial crisis – before falling back, as the world economy endured it worst peacetime shock for 80 years and asset markets collapsed.
As global growth returned, though, and traders remembered that the populous emerging markets were still becoming more populous, their energy demands ever rising, oil quickly recovered. During the three and a half years from early 2011 to mid-2014, oil was above $100 pretty consistently. Prices then started falling last June, by some 60% to their mid-January low. But Brent crude is now up 36% during the four weeks to the time of writing. So has the oil market now turned?
Back in mid-2013, America’s Federal Reserve signalled that its massive money-printing programme – so-called quantitative easing – would be coming to an end. Just the hint of “tapering” was enough to destabilise the US government bond market. The yield on 10-year Treasuries spiked above 3pc, from 1.7pc at the start of last year. The Fed, after all, since QE began in late 2008, had bought hundreds of billions of dollars of US sovereign IOUs.
For now, America’s Treasury market seems relatively stable, even though the taper eventually happened and QE officially ended this autumn. The US government currently pays a relatively benign 2.15pc to borrow 10-year money, despite its vast debt mountain just hitting $18,000bn – a mind-boggling 78pc up since President Obama took office in early 2009.
“The final word on quantitative easing will have to wait for historians,” wrote Ambrose Evans-Pritchard last week. Now the US Federal Reserve has apparently ended QE, I’d like to take a cue from my esteemed Telegraph colleague by suggesting what future historians might say.
Last Wednesday, the Fed terminated QE3 – the latest incarnation of its money-creation programme. The American version of this highly unorthodox policy began in late 2008, with the Fed creating virtual balances ex nihilo and purchasing assets such as government debt and mortgage-backed securities, often from bombed-out banks.
The US authorities originally billed QE as a $600bn exercise. By unlocking frozen interbank markets, it was supposed to spur growth, breaking the credit crunch. As meaningful recovery remained elusive, though, QE2 was launched in 2010, with its successor two years later.
In sum, the world’s most important central bank has fired $3,700bn from its monetary bazooka. America’s QE has been six times bigger than envisaged. The Fed’s balance sheet has grew more than three-fold in just over half a decade – an unprecedented monetary expansion. And it’s not just America, of course.
QE – IT’S NO JOKE
A Western central banker is ordering a pizza over the telephone.
“Should I cut your pizza cut into six slices or eight slices, sir?” asks the youthful restaurant staffer.
The central banker pauses and scratches his chin. “Hmmm, now let me see,” he says slowly, weighing every word.
“I’m feeling hungry tonight … so cut my pizza into eight slices, please”.
The central banker then pauses again, asks for a moment and then gives his final instruction.
“Actually, I really am quite famished. Could you slice it into ten?”