POWELL'S PIVOT PITCHES INTO 2024 HEADWINDS

Central banker Jerome Powell’s sudden turn on interest rates has raised hopes for the global economy next year. But the post-pandemic macro path isn’t straightforward

- SATYAJIT DAS

FINANCIAL markets resemble toddlers self-absorbed, focused on instant gratification, prone to tantrums and easily distracted. Both of them love comforting narratives, especially fairy tales with happy endings, no matter how farfetched. Analysts and commentators today are enraptured by the 'pivot'-significant cuts in official interest rates. International markets have factored in much lower US rates in 2024 and long-term government bond yields have fallen, in anticipation, by nearly 1 percent.

Amusingly, the new narrative reflects a marked shift from the 'pause' (stopping rate increases), the 'skip' (temporary delays in rate rises), and 'higher for longer' (persistence of higher rates) memes that have dominated 2023. There are reasons for scepticism.

First, the change is based on recent comments by US Federal Reserve chair Jerome Powell. The faith is touching given that central bankers failed to forecast the current surge in prices, branded it 'temporary' and confessed that they did not really understand inflation. In any case, interpretation of a policy maker's gnomic pronouncements is problematic. As that paragon of central-bank-speak, Alan Greenspan, told a US Senate committee in 1987: "If I seem unduly clear to you, you must have misunderstood what I said." Moreover, other members of the US Fed as well as the Bank of England and the European Central Bank have been more circumspect about loosening monetary policy.

Second, global inflation, which would need to fall to allow rate cuts, remains well above the 2-3 percent targets commonly accepted. Recent falls are driven primarily by falls in volatile energy and food prices, which may not continue. While some goods prices remain weak, primarily due to industrial overcapacity in China, rise in wages (note the various labour settlements in advanced economies) are yet to flow through into services costs, which make up 60-70 percent of economic activity.