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According to the minutes of the last ECB meeting, the members of the regulator do not rule out a sharper increase in the interest rate. It is hard to say how relevant this information is today. Nevertheless, taking into account the threat of fragmentation and recession, it is unlikely that they will “go wild”. Still, we could see a 0.50% rate hike in September.
As for the US, back in June, Powell said that a preliminary reading of inflation expectations from the University of Michigan had further influenced the regulator’s decision to raise rates by 75 basis points. It is worth mentioning that the preliminary reading showed that Americans expect inflation of 3.3% over the next 5 to 10 years.
St. Louis Fed economists found that, despite the fact that consumer price growth expectations have risen sharply, the market is betting that inflation will fade over the medium-term horizon. Thus, inflation expectations for the next 12-month horizon rose from 3.6% to 6% from February to March 2022. In contrast, the five-year outlook remains at ≈2.5%.
Will a tightening of monetary policy help?
According to Geoffrey Frankel, Harvard professor and former member of the U.S. President’s Council of Economic Advisors during the Bill Clinton administration, the rejection of protectionist policies could have played a much larger role. If the Johnson Act is repealed, the container congestion crisis at U.S. ports will disappear.
If tariffs on infant formula imports are eliminated, the baby food shortage in the world’s leading economy will disappear. The same goes for Canadian lumber: by returning tariffs to previous levels, the cost of housing construction will also fall. According to Peterson Institute estimates, trade liberalization could reduce the current spike in U.S. inflation by 1.3 percentage points.
Looking forward, the world’s leading economy is almost officially entering a recession. According to the Federal Reserve Bank of Atlanta’s GDPNow model, the US economy is expected to contract by 1.9% in the second quarter, up slightly from the July 1 forecast of -2.1%.
As for the rest of the world, Nomura Holdings Inc expects the eurozone, the United Kingdom, Japan, South Korea, Canada, and Australia to enter recession in the next 12 months. The cause is monetary policy tightening and the rising cost of living, which will cause a “synchronized slowdown” in the global economy. Nomura predicts that the downturn will be deepest in Europe and could get even worse if Russia cuts off gas supplies to the region.
