If they abandon populism, central banks will be able to fight inflation

If they abandon populism, central banks will be able to fight inflation
If they abandon populism, central banks will be able to fight inflation

The chances of having low inflation, of 2-3%, in the next few years are very small, claims Krasimir Yordanov

In all likelihood, the Fed, like other central banks, will be able to kill inflation by raising real interest rates above zero, but only if we don’t have policies that are populist. Otherwise, inflation will continue to smolder. This opinion was advocated by Krasimir Yordanov, founder and analyst of KY Research, in the broadcast “In development” on Bloomberg TV Bulgaria.

The main takeaways from Fed Chairman Jerome Powell’s remarks at Jackson Hole that he will continue to tighten policy until he sees clear signals that inflation is under control and approaching the Fed’s desired levels are that “The Federal Reserve is not happy that markets bounced back, made a correction. In addition, credit spreads have narrowed and financial conditions have returned to levels where they were at the previous statement, when the Fed said it wanted to see further tightening of financial conditions,” Yordanov said.

“For this reason, Powell was extremely clear and concise in sending a clear message to the markets that US Treasury yields must rise further.”

One should not even look at the main interest rate applied by the Fed, the interlocutor emphasized. Because “modern interest rate policy, which the Fed and other central bankers conduct, is based on verbal communication that immediately affects the yield on two-year and five-year and ten-year government securities, which in turn tightens financial conditions and represents the true level of interest rates in the economy”.

“The market fell quite a bit after Powell’s speech. The major indexes fell 3-4%. They were surprised again. What is one of the main messages from the bankers on the Fed’s board of directors is that they want to raise interest rates , until their real value becomes positive. That is, the level of interest must rise above the level of inflation and stay there.”

Regarding estimates that “half of inflation is due to fiscal policies” and that “such inflation is not only persistent, but also requires other tools and approaches to solve the problem”, the guest said that the reduction of costs related to direct payments to population is imperative, as is the increase in spending related to long-term investments such as infrastructure.

“But this has a high political cost, and neither the Republicans nor the Democrats want to do it. So the chances of having low inflation, of 2-3%, in the next few years are very small.”

The interlocutor’s short-term expectations are that by the end of the year, inflation will mark a decline in growth rates due to the sharp slowdown in economies, as well as due to the temporary drop in prices of energy raw materials, such as gas.

The problems in Europe are similar, with the exception of the energy crisis – again we have increased transfer payments, the guest pointed out. “But here, against the background of the huge increase in the price of energy and gas, a number of governments are softening the blow on consumers, and real inflation has not yet appeared. Its real levels should be even higher.”

“Overall, the Eurozone economy will contract. For Europe, the outlook is not so good. It will probably be the same again next winter, and then when enough LNG terminals are ready and in operation, we can expect a stabilization of the situation and possibly a significant downward shift in gas and electricity prices, which will also lower inflation.”

Overall, the Eurozone economy will shrink. For Europe, the outlook is not so good.

Krasimir Yordanov

founder and analyst of KY Research

When will inflation peak in Europe as well as in the US? Will we have another peak in natural gas prices? What to expect from the euro-dollar currency pair? What will happen if the Chinese central bank devalues ​​the yuan and what is the risk of this happening? How will such a move affect the Chinese economy and others in the region? Is a new Asian crisis possible and what will its dimensions be? What does Bank of Japan policy look like as it continues to stick to its loose course? Will we see significant volatility in the yen-dollar pair? See the entire conversation on the Bloomberg TV Bulgaria website.

The article is in bulgaria

Tags: abandon populism central banks fight inflation

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