When will the central banks start to cut interest-rates?
This week the world’s major central bankers arrived in Sintra to take advantage of the generous hospitality provided by the European Central Bank or ECB. The first thing we learned was that the long-running plan to boost each others pension pots never runs out of steam.
Federal Reserve Chairman Kevin Warsh has tapped former Bank of England Governor Mervyn King to co-chair the US central bank’s new task force on communications.
>Warsh is making a shake-up of how the Fed a key plank of his leadership, and has vowed to rethink how officials signal their outlook for monetary policy to both the public and investors. ( Bloomberg)
The Bank of England gives former Federal Reserve Chair Ben Bernanke a job and now the Federal Reserve returns the favour for a former Bank of England Governor. They can of course be relied upon the provide the answers wanted by the present incumbents. You may also note that Baron King of Lothbury does not get his full tirle.
Moving now to US monetary policy we see that The Donald is hinting at interest-rate cuts again.
“He’s got a board that maybe is a little bit hostile, and unfortunately, and maybe a board that wants to do the wrong thing… He’s a great guy and a great pro, and I know where he’d like to be, but he has to do what he has to do.” (CNBC)
This has been added to by Kevin Hassett on Fox Business News.
“We trust that the Fed will be data dependent, and that if they think they’re going to see inflation numbers that are through the roof that are going to make them really have to raise rates, well, they’re going to be proven wrong. But we’ll see what the data have to say…
These days in theory President Trump has in theory control because he has appointed four people to the Federal Reserve. The catch is that one of them is the former Fed Chair Jerome Powell with whom he has so publicly fallen out with.
Also yesterday we got the employment release.
The U.S. economy added 57,000 jobs in June and revisions subtracted a combined 74,000 jobs from the previously reported figures for May and April. (Nick Timiraos)
The mantra from Kevin Warsch is that he is looking at inflation. The catch is that he prefers this inflation measure from the Dallas Fed.
The Trimmed Mean PCE inflation rate over the 12 months ending in May was 2.4 percent. According to the BEA, the overall PCE inflation rate was 4.1 percent on a 12-month basis, and the inflation rate for PCE excluding food and energy was 3.4 percent on a 12-month basis.
How quickly will we see that used to justify interest-rate cuts? For now markets are sending their expected rises into their equivalent of the long grass.
TRADERS FULLY PRICE IN FED RATE HIKE BY DECEMBER PREVIOUSLY OCTOBER (@DeltaOne)
The ECB
The news here came from the update from Eurostat on inflation.
Euro area #inflation expected to be at 2.8% in June 2026, down from 3.2% in May 2026. Components: energy +8.7%, services +3.2%, food, alcohol & tobacco +1.6%, other goods +0.9% – flash estimate
That is quite a bit lower than what the ECB had been suggesting (3.4%). Fortunately it has a leader who has had a career demonstrating wide experience in dealing with failure, admittedly usually her own but she is battle-hardened.
In less than three weeks, risks to euro-area inflation and growth have become less pronounced, ECB president Christine Lagarde said today: (Bloomberg)
Those who read my Monday update which noted undershoots in expected German and French inflation will not be surprised by that. This morning she has released this.
Raising interest rates in June was the right choice, President Christine @Lagardetells @LesEchos
. We are facing an external supply shock spreading through the economy, whose indirect effects are already visible. We are closely monitoring the risk of second-round effects on inflation.
Also we received a statement that is somewhat bizarre even for her.
LAGARDE SAYS MAJORITY OF POLICYMAKERS WERE READY TO HIKE IN APRIL (@FirstSquawk)
So why didn’t they?
Also those who recall the previous period when she was rumored to be leaving the ECB may wonder why she is playing that card again.
ECB President Christine Lagarde says she could resign before her term ends to engage in France’s political debate, Les Echos reports. (@FirstSquawk)
She is according to various surveys very unpopular amongst ECB staff no doubt at least partly driven by her willingness to through forecasters under the bus. But people like her are usually untroubled by such things. Returning to monetary policy the next ECB hike looks to have disappeared.
The Bank of England
The revealing part below is that Governor Andrew Bailey continues to talk about interest-rate cuts rather than rises.
Bank of England Governor Andrew Bailey cautioned that it is too early to consider interest-rate cuts, warning households are yet to feel the full effect of the Iran war.<
Speaking in Sintra, Portugal, on Wednesday, Bailey said reductions to borrowing costs are “off the table at the moment” even as the threat from inflation recedes following the plunge in energy markets. (Bloomberg)
Apart from his misfiring performance at the first Bank of England meeting after the war started – where he ramped interest-rate rise expectations – Governor Bailey has continued to focus on cuts. The UK equity market seemed to get the message yesterday as the FTSE 100 surged by around 1.5%.
UK Statistics Authority Reception
Yesterday afternoon I attended this Reception at the QEII centre in Westminster. It opened with a video from the head of the parliamentary committee that is supposed to be looking into the issues here. Perhaps Simon Hoare MP was afraid if he turned up that he might be asked about the issue I have sent to him on social media this morning.
@Simon4NDorsetThank you for your address to the @UKStatsAuthReception yesterday. Unfortunately you forgot to let us know what has happened to the PACAC Report which is at least 6 months late. Please can you put the record straight.
Then we received a speech from the interim Chair Penny Young which was full of buzz words and indeed word salads but little hope of reform. I am sorry to tell you that Penny Young decided that wall to wall complacency is the best response to the problems in UK Statistics. After the statistician Simon Briscoe suggested the UK Statistics Authority had been such a failure it should be closed down the the Q & A session switched to curated online questions after which in spite of msny in the room wanting to ask further questions the meeting was closed.
Comment
How long do you think they will wait before cutting interest-rates?