13 August 2024: Reform is still critical of Reeves’ plans

Catherine Mann, by far the most hawkish member of the Bank of England’s Monetary Policy Committee, still believes that the Bank should exercise caution when considering any further cuts in interest rates, despite inflation having fallen to meet its target of 2%.

Mann, who voted for rates to remain unchanged, found herself in a minority as the Committee voted by five votes to four to cut interest rates for the first time in four years at its most recent meeting.

In an interview she gave to the Financial Times recently, Mann confirmed that she has become less hawkish over the past six months, changing her vote from a “rise to no change.”

On a scale of one to ten, in which one is most dovish and ten is most hawkish, Mann believes that she has fallen from a ten to a seven.

Mann believes monetary policy is more complicated than a simple trade-off between promoting growth and controlling price increases.

Interest rates are an extremely “blunt instrument” with which to exert that control, and while she believes that rates could have been raised more quickly when the Bank began to tighten in December 2022, one way or another we have arrived at where we need to be currently.

Mann remains undecided on how she will vote at the next meeting since, despite her abiding hawkish views, she is prepared to be driven by the data.

One of the most important monthly data releases will be happening later this morning, with the publication of the July employment report.

She expects unemployment to have risen marginally as the number of vacancies falls, but it is the level of wage increases, which she believes provides a good indicator of the level of “secondary inflation” remaining within the economy, which will interest her the most.

If average earnings in the three months to June fall, as predicted, to 4.6% a further cut is expected to be agreed on September 19th, unless there is an overriding reason elsewhere in the economy.

With MPs currently enjoying their summer recess, the five members of Reform UK who won seats in the election have seen their influence yet to take its full effect.

One of its MPs, Lee Anderson, has been fiercely critical of the decision to means test the winter fuel payment, which, he believes, will see up to two million pensioners have to decide whether to eat properly or keep their homes warm this winter.

Anderson said it was “cruel” to penalize the most vulnerable section of the public for an issue that she would have known about “well in advance.”

The pound began the week on the front foot, rising to a high of 1.2794 as traders believe that the Fed is almost certain to cut interest rates next month, while the MPC is still undecided. It was unable to hold onto all its gains and slipped back to close at 1.2761.

Donald Trump’s running mate in the upcoming Presidential election wants to see Jerome Powell made accountable to the public for his and his colleagues’ monetary policy decisions.

Although this is little more than a sound bite from a politician who is trying to show his worth, he may well have hit on one area of the economy that Trump is expected to leave well alone.

Simply by gauging the “annoyance factor” of Powell’s performance in his second term as Chairman, it is clear that he is doing a good job.

JD Vance believes that the Fed should be judged against its compliance with political manifestos. In essence, if he and Trump mandate a growth rate of, say, 3%, that should be the FOMC’s primary target, respective to its effect on inflation.

The FOMC currently has a dual mandate to promote employment while maintaining price stability. Employment is seen as a proxy for GDP growth, but overall, it remains a matter of degree.

The 2% inflation target which Powell sees as sacrosanct is a self-proclaimed level for price increases which the Fed, as well as all the other G7 Central Banks, complies with.

Powell has confirmed on many occasions that even though 2% is difficult to maintain given the geopolitical landscape, he sees no reason for it to change.

Jamie Dimon, the CEO of JPMorgan Chase, believes that the 2% target is outmoded and has become a fictional event on a par with a soft landing and stagflation, both of which no longer exist.

For inflation to fall to 2% in the current environment, interest rates would need to rise by another one hundred basis points, which would certainly lead to massive job losses and a recession.

A recent poll conducted by the magazine Newsweek showed that surprisingly, Kamala Harris is more trusted to oversee the economic challenges the country faces than Donald Trump.

Gradually, several of Trump’s supposed advantages are being whittled away, leaving the race to be the next President too close to call.

The dollar is gradually being affected by the probability that the FOMC will cut interest rates at its next meeting on September 18th.

The index fell to a low of 103.13 yesterday and closed at 103.09.

It may be difficult to imagine, but to see any meaningful growth in the Eurozone economy over the next twelve to eighteen months, the ECB is going to have to become “super dovish.”

Considering that its Governing Council has found it exceedingly difficult to sanction even the one rate cut that has taken place this year, the expectation that it could cut rates six times before the end of next year is fanciful in the extreme.

Current inflation estimates are for inflation to fall to an average of 2% over the same period, which is unlikely to enthuse the decision-makers, even if their most hawkish and influential member, Robert Holzmann will retire halfway through 2025.

Since Jens Weidmann left the Bundesbank in a fit of pique over his being passed over for the job of ECB Presidency, the German Central Bank has lost much of its power.

Weidmann’s successor Joachim Nagel indeed says all the right things, but in concert with Chancellor Olaf Scholz does not command the same gravitas as the team of Merkel and Weidmann.

It has been said many times that the entire European Union requires significant structural reform.

Apart from crying out for a Fiscal Union which will make monetary policy far more effective, it is incredible that there is not a Eurozone-wide Finance Ministry with a Minister reporting to the EU Commission President.

Although she has come in for severe criticism this year, it has become an ever more impossible job for Christine Lagarde to perform since she has the multiple roles that the Central Bank needs to fulfil from a regulatory perspective as well as overseeing policy for the entire region.

This may have been an easier role when inflation was under control, but coincidentally, since Mario Draghi stepped down, the need for a bureaucrat with Central Banking experience to fill the role has become increasingly evident.

Even if the ECB were to “do the impossible” and cut rates six times over the next year, growth and output would be unlikely to receive the expected boost because the Eurozone is riven with the self-interest of its twenty nations, with others set to join.

The euro is mired in a 1.0860 to 1.0940 range and is expected to continue until next month’s monetary policy meetings have taken place.

There is solid buying interest at lower levels driven by the ECB’s continued hawkishness, while on any approach to 1.10, there is significant selling interest from long-term traders and investors.

The single currency reached a high of 1.0934 yesterday as traders saw the possibility of monetary policy in the U.S. and Eurozone converging. It closed close to its high at 1.0931.

Have a great day!