Author: Martin North

How will global investors react to the overriding message from the Central Bankers Lovin-in at Jackson Hole? Aussie markets were 2% down on Monday morning.

Federal Reserve Chair Jerome Powell’s stern message was that interest rates are going higher for longer in a painful fight against inflation. Be clear, he quashed thoughts that the trajectory of monetary tightening could soon be tempered.

Investors now see the Fed’s policy rate peaking in March at around 3.80% and pared bets on a decline in 2023. The US yield curve between the five and 30-year maturities inverted for the second time this month, while the gap between the higher two-year yield and the 10-year rate widened.

The inversions suggest the bond market anticipates a recession is the necessary sacrifice to get price pressures back under control. Though I note already, some bank economists are saying, this is all talk, because the bond market hardly reacted.

Expect to hear more on the trade-off between higher rates of inflation and higher unemployment, and whether the 2-3% targeting which has become a cornerstone of Central Bank doctrine is relevant. Meantime, other than commodities, and the USD, there is nowhere to hide – and Bitcoin came down in sympathy.

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Remember when the mantra from Central bankers was inflation was temporary? This was still being recited late last year, despite the rapidly expanding money supply created by the reaction to COVID (which had already been expanded by the reaction to the GFC in 2007 and beyond.

Ultra-low interest rates were coupled with excessive Government fiscal support from direct payments to businesses and households, and indirect support to businesses. This combined stoked home prices, and credit growth, in an attempt to maximise employment and sheeted inflation mainly to supply chain disruptions which would sort themselves out. RBA Governor Lowe late last year said no rate rise until 2024, and only recently changed his tune.

But fast forward just 6 months, and the tone has been changed completely, with a bevy of the world’s top central bankers delivering a stern and unified message on the need to curb inflation, declaring at Jackson Hole that it is broad based, here to stay and will require their forceful action. Like lemmings, they are now all running to the “must kill off rampant inflation at all costs” exit instead.

Begs the question, were they wrong then, or are they wrong now? And whilst they plan to lift rates significantly higher, will it actually tame inflation or not? And what collateral damage will these rate increases cause? I for one have little confidence in the whole Central Planners and Bankers edifice. They are of course unaccountable, and unelected.