Investors still digesting the Federal Reserve’s interest-rate skip last week will get food for thought from events around the world.
Chairman Jerome Powell appeared to take a leaf from the Reserve Bank of Australia’s book in keeping rates unchanged while also signaling more hikes ahead. The RBA paused in April and then resumed hikes in May. New Zealand waited a few months with rates on hold, but, sure enough, then lifted them again.
If hold-then-hike is becoming fashionable, raising rates in the teeth of a recession could soon be all the rage. That’s what the European Central Bank did last week, and it signaled another upward move next month.
The U.K., Switzerland and Norway are all expected to increase interest rates this week. The economic outlook isn’t great in any of those countries. The U.K. isn’t in recession, but it’s teetering awfully close–it’s the second-worst performer in the Group of Seven right now behind Germany, which has contracted for the past two quarters.
Powell will address Congress with testimony this week. Lawmakers may want to ask if he, like his ECB counterpart Christine Lagarde, will be prepared to keep raising rates even when the economy is shrinking. He may be able to give a nuanced answer–the U.S. inflation rate right now is about 4%. In the euro region, it’s about 6%, and in the U.K. it’s still north of 8%.
That suggests that Powell may have some room to extend the Fed’s pause to see if past hikes can do some more work to get inflation down. If he can, he may start a new trend of keeping rates on hold for a long time–or even considering cuts.
Write to Brian Swint at brian.swint@barrons.com
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