Central Banks Likely to Make Policy Errors

(RoyalPatriot.com )- In a survey conducted by Deutsche Bank, most respondents said that the Federal Reserve and the European Central Bank are likely to keep policy settings too loose while the Bank of England will probably err on the hawkish side.

The Fed has been inching closer to tapering off its $120 billion in monthly asset purchases, but the pace and timing remain unsettled with officials expressing concern over tension between the sharp rise in inflation and weaker labor market recovery signals.

In the United States, inflation has surged to 30-year highs. Other parts of the world are also seeing intense price pressures.

Central Bank officials remain adamant that the spike in inflation is temporary, believing that once supply chain problems abate, prices should settle back down to target.

And while the Fed and the European Central Bank are both looking at adjusting their respective asset-buying programs, they continue to maintain that there’s no rush to raise interest rates.

Despite this, money markets are charging ahead with pricing aggressive interest rate rises, betting that policy will be tightened much sooner and at a faster pace than rate-setters are signaling. End-2022 rate hikes are 100 percent for the Fed and 90 percent for the European Central Bank.

While the September jobs report showed unemployment falling to 4.8 percent and the number of unemployed in the US dropping by 710,000 to 7.7 million, employers only added a disappointing 194,000 jobs last month – far below market expectations. And while the number of unemployed in September was considerably lower than the pandemic-era high, it still remains higher than the pre-pandemic rate of 5.7 million.

The Labor Department’s Job Openings and Labor Turnover Survey released in early September showed that the number of job vacancies jumped to a record 10.934 million by the end of July. By the end of August, the number jumped again to 11.1 million. The latest JOLTS report released this week shows job vacancies dropped to 10.4 million.

Economist Nouriel Roubini, known for his accurate forecast of the 2008 financial crash, recently told Bloomberg that he thinks the Fed will “wimp out” and “postpone any finishing of tapering or raising rates” if economic growth slows and markets sell off like they did in the fourth quarter of 2018.

Roubini also warned that stagflation will persist for several quarters and the core PCE inflation gauge will remain above 3 percent in 2022.