By Stefan Koopman, Senior Macro Strategist at Rabobank
In light of the softer data on wages and on services activity from last Friday, there was a lot riding on Fed Chair Powell’s speech at the Riksbank event on central bank independence. However, Powell said nothing specific about the upcoming Fed meeting. The Chair was, however, able to squeeze in a reference to the Fed prioritizing inflation over employment in the near term, when he said that the case for monetary policy independence lies in the benefits of insulating monetary policy decisions from short-term political considerations. According to him, “the absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.” It’s hard to take such general remarks as a cue for one vote or the other. Logically, markets shrugged and remained focused on the US CPI data coming up tomorrow. A soft reading that vindicates the recent improvement in sentiment is now widely expected.
Perhaps Powell’s most interesting comments pertained to climate change. He said that the “Fed is not and will not be a climate policymaker”. Well, tell that to ECB President Christine Lagarde or board member Schnabel, who have been more than vocal on taking climate policies into account. The main difference between the two central banks lies in their mandates:
The Federal Reserve Act demands the Federal Reserve to conduct monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”. It will require new and explicit legislation from Congress to allow the Fed to use monetary policy or supervisory actions to actively promote the energy transition. Such legislation won’t be forthcoming in this Congress, that’s for sure, and it is hard to see any political consensus forming further out too.
The ECB, instead, has already seen its mission creeping beyond the core responsibility of maintaining price stability –which, as Powell said, work best when politics is at arm’s length–towards its secondary objective of “supporting the general economic policies in the European Union”. Among others, these are "sustainable and non-inflationary growth respecting the environment" and "a high level of employment and of social protection".
This leaves the democratically unaccountable central bank exposed to political interests, allowing the institution to be (mis-)used for implementing policies and measures that may not have been successful in the political process. In other words, if governments fail to hold carbon emitters accountable by implementing taxes specifically targeting them or by tightening regulations on their activities, the central bank could be the go-to work-around. Enmeshing the central bank more and more in politics muddies the waters over its responsibilities, which eventually might compromise its ability to set interest rates without considering short-term political factors. Secondly, as the Global Daily highlighted many times, there is no reason why mission creep should stop at climate change. If you can do Green QE, you can also do Camo QE.
I am writing today’s Daily from my home near Amsterdam on a January early-morning and it is slightly above 10 degrees Celsius outside. I am not using any heating and probably won’t turn on it until the evening. It was expected that Europe would experience a difficult winter with freezing temperatures, gas shortages and forced rationing, widespread industrial shutdowns and a severe economic downturn, but the weather gods decided otherwise. A few more weeks of above-average temperatures and the 2023 filling season from April to end September may be a breeze.
The other popular euro bull narrative of the latest couple of days – as this is typically how long narratives last in the current volatile environment – is that Chinese economic developments have been largely beneficial to Europe in two subsequent ways: first, last year’s zero-Covid policy helped to keep commodity and more specifically energy prices in check, while it wasn’t as restrictive enough to prevent a gradual recovery of supply chain performance. It’s hard to imagine, but Europe’s inflation problems could have been a lot worse. And now, when Europe’s growth outlook is at serious risk, the Chinese have U-turned on zero-Covid and look focused on boosting domestic demand after the current wave of infections crests.
This is of course good news for European exporters of capital- and consumer goods, but there are some important caveats. As in large parts of the Western world in 2021/2022, a lot is riding on the huge pile of pandemic savings that has been amassed during the long periods of suppressed consumption. But in China too the distribution of these excess savings is strongly skewed towards the wealthy. Secondly, we also believe that the ongoing problems in China’s property sector will cap the recovery of consumer demand, while the sector itself isn’t the infinite source of economic growth and local government funding as it was prior to 2021. Indeed, the only way Chinese consumption can rise in a significant and structural way is when consumers get a larger share of the economic pie: that is still a long way off.
Finally, before we wrap up today’s comment, it’s worth having a look at the latest update of Indeed’s posted wage figures. Their data are based on new job advertisements on the Indeed jobs platform and give an idea of the underlying wage dynamics. These dynamics should show up with a lag in the official average wage data (e.g., as an analogy, think of the official data as a bath tub full of current wage contracts, with new contracts of hires coming out of the faucet and old contracts of fired/resigned workers leaving through the drain). The Indeed figures continue to point at a deceleration of advertised wage growth in the United States (to 6.3% y/y, from a peak of 9% in March 2022 and 3% in December 2019), and more muted deceleration in the United Kingdom (6.0% y/y, from 6.4% in June) and six Eurozone countries (4.9% y/y, from 5.2% in November). So in all jurisdictions, wages and salaries advertised in new job postings are still rising faster than before the pandemic and the subsequent “Great Resignation”, but growth seems to have peaked while remaining well below inflation.