Interest rate riddles
The past week was a busy one for central banks in three major economies. These scheduled policy meetings took place against the backdrop of somewhat easing concerns over the health of the global economy, despite ongoing uncertainty.
However, each of the three central banks faces a unique set of challenges, leading to different responses.
Let’s start with the most important one, the US Federal Reserve cut its policy rate by 25 basis points to a range of 4% to 4.25%. While the decision was expected, it doesn’t mean it was straightforward. Two committee members dissented, which is rare enough, but they dissented in different directions. Stephen Miran, an economic adviser to US President Donald Trump and temporary member of the Fed Board of Governors wanted a larger rate reduction. The president of the Federal Reserve Bank of Kansas City, Jeff Schmid, voted for no change.
Chart 1: Policy interest rates
Source: LSEG Datastream
Apart from internal disagreement, the Fed faces the additional problem of a lack of official data on the state of the US economy as the government shutdown drags on. The consumer price index for September was released because it has important practical implications beyond economic analysis: social security benefits are indexed to the CPI, as are inflation-protected bonds. However, it is not a given that October CPI data will be released if the shutdown continues, and there is still no sign of a breakthrough in Washington.
Consumer inflation rose to 3% in September. While economists expected a slightly higher number, the fact remains that inflation is rising away from the 2% target, and it is highly unusual for the Fed to be cutting rates when inflation is increasing. Then again, these are unusual times. The silver lining is an ongoing steady decline in rental inflation, which partly, due to the way it is measured, has long been elevated and slow to decline. Non-housing service inflation did not rise further but remains sticky around 4%, however.
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