The end of summer, for economists at least, is marked by the Jackson Hole symposium. This annual central banker summit, set in the picturesque Wyoming mountain resort, is generally of interest only to faceless financial investors and policy wonks. This weekend’s gabfest, though, is likely to attract more attention.
One reason is that this could be the last hurrah for Janet Yellen. The diminutive Federal Reserve boss, the only woman ever to hold this vital post, could soon be replaced. Her first term expires in February – and President Trump could decide not to reappoint her.
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.
“It’s our expectation that rate increases this year will be appropriate,” said Janet Yellen last week. The Federal Reserve boss was signaling that US interest rates will keep going up.
America’s central bank has increased rates only twice in the past 10 years. The last time, though, was as recently as December 2016. If the Fed does raise rates this year too, that would be hugely significant – suggesting the global interest rate cycle has well and truly turned. It would also pose a danger that financial markets could plunge.
“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.
“While we will always put America’s interests first, we will get on with all other nations that want to get on with us. We’ll have great relationships, we will seek common ground not hostility, partnership not conflict”.
So Donald Trump during the small hours of Wednesday morning, as part of his acceptance speech. These emollient words, and the praise he heaped on Hillary Clinton after months of campaign-trail bile, changed the mood on global markets.
UK GDP grew by 0.4pc during the first three months of 2016, we learnt last week, down from 0.6pc the quarter before. “The threat of leaving the European Union is now weighing on our economy,” claimed Chancellor George Osborne.
The Bank of England is worried about “a fall in sterling due to fears of Brexit”, we’re repeatedly told, the latest Threadneedle Street intervention also warning of “a lower path for growth” if British voters have the audacity to leave the EU.
And if only “uncertainty” hadn’t been “heightened by the UK’s referendum on EU membership”, Janet Yellen opined last Wednesday, the mighty Federal Reserve might now be able to raise interest rates, helping the US central bank steer global markets away from dependence on emergency measures and back towards normality.
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.
Interest rates are going up! Or are they? Is the era of ultra-cheap money, on both sides of the Atlantic, about to end? Or is this renewed bout of rate-rise speculation another false alarm?
Janet Yellen, who chairs the mighty Federal Reserve, is clearly signaling a rise in US interest rates soon – a move the Bank of England would probably follow. “Prospects are favorable for further improvement in the US labor market and economy more broadly,” Yellen boomed last Wednesday.
“Storm clouds gather over emerging markets”, boomed The Financial Times’ influential leader column in mid-January. This inclement headline was whipped up after the paper choose to focus on a “disorderly adjustment scenario” outlined across just a few paragraphs of the latest edition of The World Bank’s Global Economic Prospects. The 150-page tome is, in large part, about the Western world, not emerging markets. The question at its heart is whether the “advanced” economies, having remained sluggish since the 2008 sub-prime collapse, are now staging a proper return to growth.
“For the first time in five years,” reads the opening lines of the World Bank’s report, “there are indications a self-sustaining recovery has begun among high-income countries – suggesting they may now join developing nations as a second engine of global economic growth”.
Economies across Africa and Asia, in other words, along with the emerging markets of Latin America and BNE’s home region of Eastern Europe and Eurasia, are performing quite well. These nascent capitalist societies are the “engine of global economic growth”, says the World Bank.