17 May 2024: Greene advocates tighter monetary policy

Megan Greene has kept a fairly low profile since becoming an independent member of the Monetary Policy Committee. Since she is not prone to providing sound bites to the market, market participants tend to notice what she has to say when she does speak.

Yesterday, she advocated patience in deciphering the often-contradictory messages that are being given by the economy.

Often, when a monetary policy cycle ends and rates are close to pivoting, the data becomes harder to manage as only some of the statistics move in unison.

That Is the situation that is being seen currently in the jobs market.

Although there is evidence that the jobs market is cooling, as evidenced by the increase in the April claimant count, wage settlements remain uncomfortably high. It is too high for the Bank of England to consider a short-term rate cut.

Greene believes that the continuing tightness of the labour market is of greater concern than the Bank of England’s current monetary policy stance weighing on the country’s economy.

In an interview published yesterday, Greene said, “In considering for how long we must retain our restrictive stance before policy should be eased, I think the burden of proof therefore needs to lie in inflation persistence continuing to wane.”

She echoed the recent comments made by her MPC colleague, Huw Pill, in which he said that there is still “some way to go” in bringing inflation under control before the Bank could consider easing monetary policy.

Although there was a noticeable lessening of the hawkish tendencies of the MPC following its last meeting where the vote was 7-2 in favour of leaving rates unchanged, Catherine Mann and Jonathan Haskell the two members who had constantly voted for a further hike in interest rates since the decision was made for policy tightening to cease, moderated their stance and voted with the majority.

Pill reiterated that it is “not unreasonable” for the market to expect a cut in rates over the summer, even if that expectation has dimmed a little recently.

Although the Bank remains on a marginally more hawkish path than other G7 Central Banks, given the unique circumstances the UK economy faces the market still agrees with Pill that a series of rate cuts will take place this year, with the base rate falling by up to one hundred basis points by December.

The pound has seen consistent buying interest this week, although a substantial proportion of that may be considered as dollar selling as opposed to Sterling buying, a small yet significant nuance.

Yesterday, the pound lost a little of its recent impetus as its recent rally lost a bit of steam. It corrected to a low of 1.2644, but still managed to make late gains to close at 1.2670.

There are occasional murmurs emanating from the market that is beginning to grow in both volume and pace that the Fed may have been a little over-eager to end its programme of rate hikes last September.

The hawks among the Wall Street economists are beginning to see that if there had been one or even two further rate hikes, the economy may not have achieved the growth that it has achieved since September, but inflation would now be far closer to the Fed’s 2% target.

The more dovish conclusion is that inflation has become a global phenomenon and will ease to meet the target, but it may take longer than originally expected.

No one at the Fed is making anything other than moderately hawkish noises now, although there have been rumblings that rates may need to be hiked if deflation is not to stall.

The economic data that has been released about the beginning of the second quarter of the year is open to interpretation.

For example, the “dovish fraternity” will point to the moderation in the number of jobs created, while hawks will use the continued rise in wages, which is still above the headline rate of inflation despite seeing a fall from 4.1% to 3.9% last month.

Minneapolis Fed President Neel Kashkari is more realistic yet moderate in his comments on the economy and the path for monetary policy, being willing to be driven by the data and able to make interpretations based on trends and not “knee-jerk” comments.

Kashkari believes that the truth of the current state of the economy lies in the housing market, which is still healthy but experiencing a moderate slowdown consistent with the current fed funds rate. He believes that in historical terms, it is hard to gauge just how restrictive monetary policy is right now since the Fed is dealing with a constantly changing environment, which may almost be considered a “butterfly effect”.

When the Fed hiked rates above 5% some believed that the economy would nosedive into a recession, believing that the level of debt that had built up as the nation exited the Pandemic would crush the consumer.

Debt service ratios measure the amount of disposable income which is used by non-financial corporations and households to service their outstanding debt payments. This has been rising but has only now reached its long-term average of 15%.

Using this as a guide, it is possible that the Fed could indeed hike rates again without driving the economy into a recession. However, if wage increases fall dramatically as the jobs market goes from moderation to job losses, that picture may change rapidly.

The dollar index stemmed its recent losses as the speculative sellers ran into committed buyers.

It rallied to a high of 104.63 and closed at 104.51.

The Vice President of the ECB, Luis de Guindos, gave a speech yesterday in which he spoke of the effect of the current geopolitical situation and its potential effect on the stability of the Eurozone.

He was speaking considering the recent assassination attempt on the President of Slovakia.

He feels that markets underestimate the effect of events outside a nation’s borders, concentrating too much on what are insignificant monthly changes in a country’s inflation, output or economic activity.

For example, global stock markets have soared to record highs this year despite half the world heading for elections and ongoing wars in the Middle East and Ukraine.

There is an overriding concern with monetary policy changes which may be common as Central Banks in the developed world appear to course to cut interest rates, but they need to be mindful of what is happening overseas.

Europe’s macroeconomic outlook is brightening, but markets may be underestimating the potential for sudden destabilization due to geopolitics, the vice president of the European Central Bank told reporters yesterday.

Markets are very experienced in calibrating financial or economic risks but often view geopolitical risks in an all-or-nothing binary manner.

The electoral cycle in the U.S. Europe and the U.K. may usher in a different view of world events than is considered currently and that, particularly in the U.S. may bring an entirely new set of geopolitical assumptions.

European Central Bank (ECB) Board member, Isabel Schnabel, spoke overnight of her concern that while the ECB may well agree on a cut in interest rates at its June meeting, it should look “long and hard” at the data since there is a risk that it may ease rates prematurely.

She believes that while the data may predicate a rate cut in June, the path beyond that and into the third quarter is much more uncertain.

Based on the current data, a further cut in July may be unwarranted.

Schnable’s comments jar with those of some of her colleagues. She believes that inflation risks are still tilted to the upside, a view that even Christine Lagarde appears to disagree with, it since if that were the case, the ECB would not even be considering a rate cut in June.

Schnabel believes that the close the headline rate of inflation comes to its 2% target. The more cautiously the ECB needs to tread. She feels that an overshoot won’t necessarily be a bad thing.

The euro ran out of steam as it approached the 1.0929 level, which had been seen as holding potential resistance.

It reached 1.0895 but fell back to 1.0855 and closed at 1.0867.

Have a great day!