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Weekly Updates

  • Uncertainty over rate-cut timing persists as the Federal Reserve and the European Central Bank (ECB) keep pretending “data dependency” is a substitute for a proper policy framework. But, will keeping interest rates higher for longer achieve anything?
  • On inflation, higher for longer is only likely to reduce market-determined inflation, and market-determined inflation rates are both benign and tending to slow already. Persistent high interest rates will not touch fantasy prices like US owners’ equivalent rent, for instance.   
  • Keeping interest rates high should slow credit growth, but credit growth is not a threat in the US or Europe. Keeping interest rates high is unlikely to shift the current path of wage growth, which lags inflation and is naturally tending to moderate.  Market-determined prices show no signs of wage cost pressures threatening future inflation.
  • Central banks may seek to keep interest rates higher for longer as a public relations exercise—because it is what they feel is expected. Not cutting until interest rate insensitive prices slow is not particularly logical. Maintaining the unequal pain of higher rates hurts lower-income groups for longer, while potentially helping higher-income groups. The resulting imbalances distort economies and asset markets—just as persistent negative interest rates did. Higher for longer might just mean higher risks.

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