DSince 1978, the Americans have been organizing a major symposium at the end of August in Jackson Hole, in the splendid mountains of Wyoming, bringing together the heads of the main central banks of the planet. Not to be outdone, the European Central Bank (ECB) launched a similar conference nine years ago in Sintra, Portugal, west of Lisbon. From June 27 to 29, between the green hills of the luxury hotel and the spectacular dinner on the shores of the Atlantic to close the meeting, the big money makers met for the first physical edition since the pandemic.
Behind the relaxed and opulent atmosphere, the message was particularly austere. Jay Powell, Christine Lagarde and Andrew Bailey, respectively at the head of the Federal Reserve of the United States, the Fed, the ECB and the Bank of England, have each repeated it in their own way: they will do everything to stop inflation, even if it means flirting with a recession if necessary.
They will raise interest rates to reduce demand. Jay Powell accepts that “a lot of pain” economic might be necessary. Christine Lagarde warns that the tightening will take place even in the event “a more permanent loss of economic potential, limiting the availability of resources”. Clearly, even if Russia cut off the gas, monetary tightening would continue.
Inflation out of control
These remarks come to close a month of June 2022 which marked a major turning point in global monetary policy. The Western world, which struggled with disinflation less than two years ago, is now well and truly out of negative interest rates. The implications are immense: the rates offered by banks for home loans will increase, the price of assets will fall, starting with the stock exchanges, and the economic balance for companies and consumers will change.
Central bankers are forced to see it: inflation, which they are supposed to keep around 2%, is now out of control. It was 8.6% in June in the euro zone, and at the same level in the United States in May.
Now is the time for monetary rigor. Central banks had begun to change their discourse several months ago. But their actions have now changed in scale. On June 15, the Fed suddenly increased its interest rate by 0.75 points, bringing it to a range between 1.5% and 1.75%. We have to go back to 1994 to find a decision of the same magnitude. The previous week, the ECB had announced its first rate hike in eleven years, with only a quarter point in July, but most likely half a point in September. Currently at -0.5%, the European rate should be close to 1% by the end of the year.
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