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Top central bankers deliver hawkish message at Jackson Hole

Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, testifies before the House Committee on Financial Services on June 23.  (Win McNamee/Getty Images North America/TNS)
By Catarina Saraiva, Jana Randow and Matthew Boesler Bloomberg News

The world’s top central bankers delivered a stern and unified message on the need to curb inflation, declaring at Jackson Hole, Wyoming, that it is broad based, here to stay and will require their forceful action.

The heads of the Bank of England, Swiss National Bank, Bank of Japan, Bank of Korea and several European Central Bank policy makers spoke Saturday at the Kansas City Fed’s annual retreat in the Grand Teton National Park in Wyoming.

Their statements follow remarks by Fed Chair Jerome Powell Friday that sought to unequivocally commit the U.S. central bank to raising interest rates until inflation meaningfully slows.

Policy makers in Europe and the U.S., battling the hottest inflation in decades, are resolutely raising rates and pushed back against suggestions they will waver if their economies falter while price pressures remain too high.

The gathering at Jackson Hole – the first in person since the pandemic spread in 2020 – was a platform to convince investors that they would follow through even if it caused pain.

ECB Executive Board member Isabel Schnabel, the day’s most anticipated speaker, urged her colleagues to act with determination to slow price increases that in Europe are nearing 10% and in the U.S. are above 8%.

“Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high,” Schnabel said. “In this environment, central banks need to act forcefully.

“They need to lean with determination against the risk of people starting to doubt the long-term stability of our fiat currencies.”

She also acknowledged there was a risk of recession, but told her fellow policy makers that “even if we enter a recession, we have basically little choice than to continue our normalization path” – chiming with Powell’s remarks the day before that “reducing inflation is likely to require a sustained period of below-trend growth.”

ECB officials are debating what size of interest rate increase may be appropriate at their September meeting, with some arguing that a 75-basis-point increase should at least be part of the discussion. The Governing Council in July raised rates by half a percentage point.

ECB Governing Council member Francois Villeroy de Galhau, speaking on the same panel as Schnabel, said that policy makers must be determined in tackling record inflation to avoid being forced into “unnecessarily brutal” interest-rate moves later on.

There was also a discussion about how long high inflation might persist. Swiss National Bank President Thomas Jordan said structural factors in the economy may contribute to persistently high inflation for years to come, and that it’s becoming more broad based.

“There are signs that inflation is increasingly spreading to goods and services that are not directly affected by the pandemic or the war in Ukraine,” he cautioned.

Others made a similar point on Friday.

Gita Gopinath, first deputy managing director at the International Monetary Fund, said U.S. inflation will persist at least for another year or two.

Agustin Carstens, head of the Bank for International Settlements, warned that the global economy risks sustained weakness if monetary policy makers don’t work with governments to revitalize the supply issues that are likely to keep pushing up inflation.

“Central banks cannot hope to smooth out all economic air pockets, and must instead focus first and foremost on keeping inflation low and stable,” Carstens said. “Monetary policy needs to meet the urgent challenge of dealing with the current inflation threat.”

Central bankers also expressed a need to communicate more clearly and simply. The sentiment was evident in Powell’s speech, which at five pages was significantly shorter than in previous years. ECB Governing Council member Joachim Nagel said policy makers sometimes overly complicate the message.

“The story is pretty clear. Inflation is much too high. And so the answer in a situation like this is also obvious. This is what central banks have to do in a situation like that. We have to raise rates,” the head of the German Bundesbank said on Saturday

“Complicated is maybe, when we will stop, or when is the time coming where we have to stop,” he said from the audience. “And I have to say, I do not really know. It’s much too early to think about, where is the, more or less, the terminal rate.”

Colleagues from Asia shared an update from their region.

Bank of Korea Governor Rhee Chang-yong – who is also fighting inflation and presided over a 25 basis point rate increase last week – said there’s a significant chance that Korea and other Asian emerging economies will return to the low inflation and growth environment that dominated the pre-pandemic period.

On the other hand, Bank of Japan Governor Haruhiko Kuroda detailed an economic situation in his country that is very different from what Europe and the U.S. are experiencing.

“Somewhat miraculously, now we have 2.4% inflation. But almost wholly caused by the international commodity price hike, energy and food,” Kuroda said.

Inflation will turn lower in his country later this year and next, he said. “So, we have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner.”