Today’s title is a little tongue in cheek, but there is also quite a lot of truth in it. The chair of the US Federal Reserve has had particular influence over foreign interest rates this year via the ‘King Dollar’ period that exacerbated inflationary pressure for other countries. Although some of the other central banks, especially ones in Europe, were rather slow on the up-take and Japan decided to ignore it entirely. Last week he spoke at the Brookings Institute in Washington, DC, and financial-market ears were alert for any hint of policy moves they could figure out. They had to wait until the last paragraph for the key section.
Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.
I am pleased to see him make the lags point, which needed reinforcing. The second sentence rather ignores the fact that they accelerated the pace and have been making the largest rises most recently – an issue I will return to. But then we get what Americans would call the money sentence. As the Federal Reserve mouthpiece at the Wall Street Journal puts it:
What to watch: Beyond the pre-FOMC table-setting around the likely step-down to a 50-bps hike in December. (Nick Timiraos)
So, we are also now wondering about the possibility of the rise being only 0.25% this month.
House prices
As someone who has long argued these are one of the main priorities of central bankers it was hard to miss this bit in his speech:
Housing services inflation measures the rise in the price of all rents and the rise in the rental-equivalent cost of owner-occupied housing.
As readers of my work will know, that is a very odd way of measuring owner-occupied housing costs as he is forced to admit:
Housing inflation tends to lag other prices around inflation turning points, however, because of the slow rate at which the stock of rental leases turns over.
Actually it is good to see that beginning to get out into the mainstream. But the crucial bit is below and the emphasis is mine.
Measures of 12-month inflation in new leases rose to nearly 20% during the pandemic, but have been falling sharply since about mid-year .
We then get back to the issue of lags.
Overall housing services inflation has continued to rise as existing leases turn over and jump in price to catch up with the higher level of rents for new leases. This is likely to continue well into next year, but as long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year.
It is kind of him to confirm my type of analysis.
