A Shift Toward Statism
by Michael Every
We can debate the latest numbers. The Philly Fed flashed a recession warning, but US PPI data were hot, and initial jobless claims still show a very firm labor market. In Australia, the jobs report was likely much better than the weak headline suggested. Timiraos at the WSJ, who may be channelling the Fed, notes that January CPI and PPI lead economists to estimate the US core PCE deflator, the Fed's preferred inflation gauge, from +0.47% m-o-m (+4.4% y-o-y) to +0.55% m-o-m (+4.5% y-o-y) vs. 4.4% y-o-y in December.
The words we hear are unequivocal. The RBA's Lowe just told Australian lawmakers the 'lowest sustainable level of unemployment is in the low 4s', and he didn't think January jobs data were accurate as most firms still can't find enough workers. While he stressed the need to be flexible, looking at the risks of not doing enough on rates and doing too much, he underlined: "This is the first test of a new reality that most central banks are going to face." Prior to that, the FOMC's Mester and Bullard stressed the best way to pass that test is to push rates higher – both talked about potential 50bps steps again. Before them, the ECB's Lane said QT of €500bn spread over 12 quarters would only lower inflation by 0.15 percentage points and output by 0.2ppts, although there may be "non-linearities in the exit process."(!)
What central banks' deeds will look like remains to be seen, but it's clear they are going to err on the side of hawkishness.