The Fed’s juggling act

Katie Martin (0:06)

Pushkin. You like Central Banks? Everyone likes Central Banks. Markets are obsessed with Central Banks. And in the past couple of days, we've had a bunch of them setting rates and telling the world what they think. On Wednesday, we had the Mac Daddy, the US Federal Reserve. We'll get on to that in a sec. But after that, super Thursday, boys and girls, get on board. Rates decisions from Japan, Switzerland, Sweden, the Eurozone, UK. Every now and then, the schedules just sort of line up and you have a real day of it. This is one of those times. So what is the combined wisdom of the finest minds in finance? I'm going to summarize here and say it's, we don't know what's going on. Iran is bad.

Iran is bad. Higher energy prices are bad. And we have no clue how much worse it's going to get. Fun times. Today on the show, are interest rates going to hold steady or even head higher to tackle inflation? Or are they heading down to deal with a recession? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FTHQ in lovely sunny London. Joined down the line from New York City by that guy, Robert Armstrong of the Unhedged Newsletter. Rob, kind of squidgy mood today, right? In the markets, it's all got quite dark quite quickly.

Robert Armstrong (1:34)

Today is one of those days, usually before we start talking, I'm like, oh, let me call up a chart or two for me to look at what we're talking, just so I know what the actual numbers are. And today was one of those days where like, there's about 15 different charts I wanted to call up. Like my head feels like it's bursting with all the different things that are going on at once, especially in kind of central banking rates world. It's just really kicking off in an amazing way.

Katie Martin (1:59)

Yeah, it has booted off. We had the Fed decision on Wednesday, US interest rates on hold. Boring snoring, right? Except not because what Jay Powell, chair of the Fed was saying was, yeah, this inflation business coming from energy prices, we had not anticipated this and it's quite bad.

Robert Armstrong (2:20)

Well, he didn't exactly say it's quite bad. What he said was, again and again, about every 45 seconds for the entire press conference was, we don't know what's gonna happen, and I'm not gonna speculate, right? That he said, you know, this is extremely uncertain. We're not gonna speculate about war. We just don't know what the impact on the economy is. So, like, the big question for him is, and every central banker is, can we ignore inflation caused by an energy supply shock, which is the inflation that appears to be coming down the pike? And in theory, when they were all sitting at central banker school, what they were taught was, you do ignore it, because tightening interest rates doesn't make more oil appear, and you damage the economy. So like, it gets you closer to stagflation rather than bringing the economy back in balance and bringing inflation under control. But, and this week we seem to be specializing in big buts, and I don't mean to be making a pun there. There is a big but here, which is, Powell used the word leak, where he said sometimes this energy inflation can leak into core inflation.

And even worse, it can leak into inflation expectations, right? And then you have to do something, right? Like as long as the monster stays in the area marked energy, you're okay. But if it gets out of that special area, you have a real problem and they have to worry about that. But again, he said, we don't know if that's going to happen. We don't know, we don't know, don't want to talk about it. We don't know.

Katie Martin (4:06)

One of the little phrases that has been kicking around on my screen this week has been, when you have some sort of financial crisis, governments or central banks can effectively just print more money and just push money into the system. You can't print oil, right? You can release strategic reserves, but they have limits. In theory, you can run out of strategic reserves just like you can run out of your normal reserves of oil. So that's why energy shocks tend to be so horrible for economies and for markets, because you can't just turn it off. And that's basically what a lot of central banks have been alluding to in the past couple of days, which is we can see this wave of inflation coming our way. But first of all, we can't turn it around on our own. Second of all, we don't know whether this is just going to be a little kind of one-off, you know, bump higher in inflation, or whether it's a meaningful long-term shift higher in inflation, because that's, you know, very much what Powell was saying at the press conference yesterday was, you know, sometimes you get a shock from something like tariffs. That makes prices go higher, but it tends to be a sort of a one-off thing. It is plausible, like you say, that it leaks and it turns into higher wage expectations, higher inflation expectations.