Summers, Lagarde, Powell – 3 Dramatic Transformations… But Do They Go Far Enough?
Talking Heads Macro
Thu 05 Oct 2023 - 15:00 BST / 10:00 EDT
Summary
Manoj shares Larry Summers view that nominal interest rates should be around 4-5%, due to geopolitics, supply chain relocations, and green investments. He sees a higher real interest rate (r*) and potential inflation reaching 3-4%, especially during economic overheating. Manoj noted Powell's perspective shift, influenced by FOMC member Lael Brainard, who acknowledges the structural nature of labour market tightness. Powell adopts core PCE ex-housing as a crucial indicator, emphasizing the need for careful monitoring and policy adjustments due to the labour market's influence on inflation. Manoj also explores the tension between monetary and fiscal policy, where enduring low inflation promises might encourage excessive government spending. The rise in US real yields and its alignment with different asset classes and economies raises the question of whether this increase is endogenous and consistent with existing growth patterns. Investment strategies, particularly in EM countries like Mexico, Czech Republic, and Brazil, are discussed, as is the impact of fiscal issuance on market dynamics. A cautious and strategic approach was recommended for investors. Wait for comprehensive signals before making significant moves in response to potential changes in yields.
Topics
Over the last 6 months, Larry Summers, ECB Chair Lagarde and Fed Chair Powell have undergone a dramatic transformation in their views… to a varying extent, of course.
Summers now holds views that almost fully reflect our longer term views of a higher r*, higher expected inflation and higher interest rates – but all from the demand side.
Chair Lagarde’s impressive speech at Jackson Hole made her the first major central bank speech to acknowledge the threat of inflation remaining higher over the medium term despite strong central bank action, mostly from the supply side.
Chair Powell’s approach, by contrast, has focussed mostly on cyclical risks but he too now views the tightness in the labour market as a structural problem that encroaches into the Fed’s ability to deliver the inflation target.
Do these changes in perspective go far enough? For Summers, yes. Chairs Lagarde and Powell still have a way to go, since both rely on historical inflation-absorbers that are highly unlikely to work in the near or distant future.
