For some time now markets have held in check their expectations for interest rate cuts around the world at a time when the US Federal Reserve battles with price pressures, challenging other central banks’ plans to loosen rates.
In her latest discussion with journalist Janet Alverez on Sirius XM Business Briefing programme, London Business School’s Dr Linda Yueh spoke about what she termed the continued “bumpy ride” that central banks were likely to encounter as they continued to battle inflation.
What was the expectation that interest rates would be cut by the ECB in June, asked Alvarez.
With a “slight uptick” in inflation in May – Eurozone inflation came in slightly higher at 2.6 per cent, up 2..4 per cent from April – the expectation is still for a cut in interest rates said Yueh. “Recovery from high inflationary periods can never be a straight line, and will continue to be a bit bumpy,” she added.
“Market consensus is that we will see a rate cut from the ECB ahead of the FED and the BoE which could then set the tone for other central banks when they look at rate cuts,” said Yueh. “Where the consensus of opinion has changed is that there was a view that rates would come down more quickly, but the bumpy picture means that we’re going to get a slower series of rate cuts.”
In the US, the release of the Personal Consumption Expenditures figures proved steady. The April reading of the Federal Reserve’s preferred inflation measure, the personal-consumption expenditures price index, should keep the Fed’s decision on interest rate cuts on hold for the time being observed Yueh. The situation hasn’t become worse and represents slow progress toward the Fed’s 2 pr cent inflation goal over the longer run.
Was the US government too concerned about moral hazard, asked Alvarez, insofar that it impacts all parts of society, from the highly compensated leaders of large companies who fail to steer their businesses toward profitability, to the failure of banks themselves.
In response, Dr Yueh referred to the ‘Greenspan put’ a period during which The Fed, it appeared to some, had developed a policy of bailing out stock investors by injecting liquidity into the economy amid large stock market declines. This perceived tendency came to be called the "Greenspan put."
After the sub-prime crisis this approach is no longer how central banks deal with bubbles and alarms of this kind. “They’re much more likely to intervene in order to stop the bubble from bursting,” said Yueh.
Would rates up again asked Alvarez.
Dr Yueh took the view that in the US most of the inflationary pressure is domestic, so a global shock would have to be very severe for it to have an impact on interest rate decisions. In the Euro area we would most likely continue to see a gradual decline in interest rates.
To listen to the full interview, click here
