Federal Reserve Chairman Jerome Powell: Inflation is running away
Photo: Kevin Dietsch / Getty Images
What has happened so far: The head of the world's most powerful central bank announced a U-turn.
A change of course that is likely to be more violent than expected.
As a result, nervousness broke out in the financial markets around the world: share prices fell, interest rates rose, currencies crumbled.
To be continued: Highly indebted countries and companies worldwide are facing a difficult phase - including defaults and bankruptcies.
Last week, Jerome Powell, chairman of the US Federal Reserve, announced a sharper pace. The Fed will probably cut its bond purchases faster to get inflation under control. During his appearance in the US Congress, Powell dispensed with a keyword that had so far provided relative reassurance: "temporarily" ("transitory"). His core message had been for months: The current price increase was only "temporary" - the result of extraordinary tension caused by the Covid crisis. Now he formulates more urgently, speaks of self-reinforcing factors, for example wages, which are rising "at a brisk pace". There is a risk that inflation will "settle in". And the Fed must prevent that by all means.
This is what it looks like: A new chapter begins in the US monetary policy narrative.
The government and the central bank now see inflation as a pressing domestic political problem.
Gone are the days when the Fed relaxed and let things go.
The signs in the US are now pointing to
, which will send shock waves through the global economy.
there are new US inflation figures.
Most recently, consumer prices have increased by 6.2 percent compared to the previous year.
It is possible that rates will accelerate towards seven percent.
Even higher values would suggest that the Fed will exit its securities purchases all the more quickly.
An increase in key interest rates would come closer: good for inflation-plagued citizens - poison for the financial markets.
The "tantrum" of the stock exchanges
The constellation is reminiscent of 2013. At that time, Fed Chairman Ben Bernanke had promised in Congress that the bond purchases that the central bank had started during the financial crisis would be carefully scaled down. The reactions were spontaneous and violent: Long-term interest rates rose rapidly in the US - but they soared even more in highly indebted emerging markets, where prices tumbled at the same time as foreign investors fled capital. Countries with high external debt and large current account deficits - and therefore high ongoing funding requirements - were particularly affected, including Argentina, Turkey, Ukraine, Brazil and India.
There was talk of a “fit of rage” in the financial markets (“taper tantrum”).
The social and economic consequences for the emerging economies affected were bitter.
The announcement shock from America forced them to adopt a restrictive course in economic policy: In many countries, the central banks raised key interest rates, while the finance ministers went on austerity;
they imposed capital controls and intervened in the foreign exchange markets - all with the aim of stopping capital flight.
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The dollar may be the currency of the United States and the Fed may be the central bank that is supposed to take care of the United States' money supply.
In fact, the Washington authority is a kind of global central bank.
The dollar is the world's number one currency, a leader especially in international financial flows.
The Fed has therefore got into the habit of showing consideration for the rest of the world - if it can.
This was the case in 2013.
After the upheavals caused by Bernanke's announcement of an exit from securities purchases, the Fed proceeded very gently: It took more than six months before it even began to cut down on purchasing volumes.
And even then it sneaked out of the market interventions rather than making powerful signals - just no chaos, just no further confusion.
According to a study by the International Monetary Fund (IMF), the taper-tantrum period has shown what far-reaching damage could result if the Fed produced monetary policy surprises.
Little consideration for the rest of the world
The big difference to today is that in 2013 there was calm in the US on the inflation front. There was no need for the Fed to quickly tighten the reins. It acted as a precaution - to limit excesses on the markets and to remain capable of acting in future crises. Rising prices were not a major problem at the time.
It's different now: inflation is running away.
And citizens 'and investors' expectations of inflation are gradually rising as well.
When things go bad, the price dynamics solidify as the entire economic system adjusts to higher rates of price increase.
Braking such a spiral again would be an enormous feat.
In addition, there are concerns about domestic political tensions, because inflation is a burden, especially for poorer citizens, as Fed Chairman Powell emphasizes.
Fighting inflation is therefore a priority.
The interests of the rest of the world must take second place.
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It's just like this: The US influences the global interest rate level.
If the Fed pushes rates up, they will rise elsewhere too.
The cheap money that the US Federal Reserve spent in recent years and that was also looking for investment opportunities in poorer countries is now beginning to flow back.
Most affected are countries that have borrowed - apparently - cheap dollars in recent years.
Now they are faced with a threefold blow: interest rates are rising, making financing more expensive;
the dollar appreciates against their currencies, adding to their accumulated debt burden;
the ongoing corona crisis is also putting a strain on economic activities and public finances.
Asia is proving to be relatively stable - for now
In its latest “Economic Outlook”, the OECD, the international organization of market democracies, warns of high foreign currency debts in countries such as Argentina, Bulgaria, Romania and Turkey. This economy is "prone to abrupt exchange rate movements"; because an appreciation of the dollar makes the dollar debt there increase in value. A painful constellation. If then there is also political failure in the respective country, a full-blown currency crisis can result - as in Turkey, where President Recep Tayyip Erdoğan interferes in monetary policy in the autocratic manner and approves of the impoverishment of large parts of the country seems to take.
Devaluations against the dollar, in turn, help spread the American inflationary surge around the globe: Because imports are becoming more expensive in the countries concerned, the cost of living there too is rising. Various central banks have already raised interest rates. If a “further tightening of monetary policy” becomes necessary, this would “put additional strain on the economic recovery in poorer countries”, warns the OECD.
So far, economies in Latin America and Europe have primarily been affected.
Asian emerging markets, on the other hand, are proving to be relatively stable.
But that too would change if economic growth collapsed in China.
The risk that such a scenario will occur has increased, says the OECD.
The simmering wave of bankruptcies in China's real estate sector could stall the region's growth engine - and affect other countries accordingly.
Travel and trade restrictions due to the new Omikron variant of the coronavirus represent a new, difficult to calculate risk.
Inflation is "like a hump"
Meanwhile in Europe: The European Central Bank is not yet as advanced as its US counterpart.
The uncertainty is currently so great that one first wants to avoid longer-term stipulations, said ECB boss Christine Lagarde these days to the Reuters agency.
In any case, a tightening of the money supply is not yet in sight on this side of the Atlantic.
Sure, if necessary, the ECB will "not hesitate to act" and raise interest rates.
But who knows if and when it will come to that.
So far, the inflation trend looks "like a hump," says Lagarde.
And that was soon overcome.
But it is also possible that the wild story of stable money turns out to be a fairy tale in Europe too.
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