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MNI INTERVIEW: Carney To Check Trump Power Play- Ex Colleague
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Mark Carney will resist Donald Trump's new "pressure tactic" of threatening more tariffs and is prepared to walk away from a new trade deal instead of offering major concessions, a former finance department colleague told MNI.
“Carney understands power, and he understands that the only way to deal with Trump is not to cave in,” said Julian Karaguesian, a McGill University lecturer who has been a special trade adviser at the finance department and an economic adviser at Canada's embassy Washington. "If we cave, they will come for more.”
Resisting Trump demands over the month before new tariffs on CAD30 billion of exports is possible because Carney's political support is stronger than the U.S. president's, Karaguesian said. American claims of not needing products from north of the border is also undercut by signals that officials want access to Canada's critical minerals, energy and aluminum, he said.
China countered U.S. threats cutting off critical mineral supplies, which was more successful than offerings by leaders in Germany, France and the UK, Karaguesian said. “I think that behind closed doors Washington is asking in the context of CUSMA for privileged access to our water, our critical minerals, our uranium and our oil and gas,” he said.
Canada's resistance is boosted because the economy avoided a recession many investors predicted after the first round of U.S. tariffs, he said. Inflation is also lower than in the United States even though the response to the first round of tariffs was dollar-for-dollar countermeasures. Carney's plan to double non-U.S. exports further boosts Canada's cause over the next few years, he said. (See: MNI INTERVIEW:Export Rebound Gives BOC Scant Reason To Cut-EDC)
SAVING RUST BELT VOTES
“He’s got another three years in his mandate, and so I think if we have to take more hits from the Americans as we develop our relationships with China and Europe, that by the end of the three years Carney’s calculating we may have new sources of growth.”
Trump sought a quick win to show strength to voters ahead of Congressional mid-term elections, contrasting with setbacks at the Supreme Court on tariffs and with the Iran war, Karaguesian said. New tariffs are a "pressure tactic" in the short run but Karaguesian said the U.S. will come back with bigger demands as talks pick up. “They still see squeezing us as the path of least resistance to some kind of concessions victory,” he said.
An inability to compromise on major sticking points like autos, steel, digital taxes and dairy subsidies leaves little prospect of a breakthrough anytime soon, Karaguesian said. “I don’t think they are going to give back steel because steel is in the Rust Belt states, and those are swing states.” (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)
Carney would likely pay a political price if he erodes Canada's "supply management" of dairy and poultry, Karaguesian said, which is popular in vote-rich Quebec.
RUTHLESS GREAT POWER
Canadian leaders are also missing the bigger point that the U.S. has been "thickening" the border with its northern neighbor since the 9-11 terror attacks, he said.
“I don’t think a broad deal can be worked out, unless we’re willing to have a completely asymmetric trade deal where we give a lot of concessions,” he said. “Unless Trump caves in and they relent a bit on us, I don’t just see a successful agreement in the near future.”
One area where Canada could give up something without much pain is participating in supply chains with the Detroit-based automakers, Karaguesian said. Most of Canada's domestic assembly is now done by Japanese-based firms and the total number of cars made in Canada has tumbled over time, he said. Similarly, the U.S. can't supply its own aluminum needs and is already signaling it will ease tariffs on Canada, he said.
Failing such compromises, another way to resist is signing more defense contracts with European suppliers instead of American firms, Karaguesian said. Carney says the U.S. used to get about four out of every five dollars of that work, and that era is ending as relations become less stable.
“This is a ruthless Great Power, and the way you deal with it, you fight back,” Karaguesian said. "He actually is prepared to walk away from a bad deal, and he’s prepared to have no deal over a bad deal.”
Jul-23 16:09
The European Central Bank held its key interest rates on Thursday and opened the door to a hike in September, as new tensions in the Middle East push up energy prices again.
While ECB President Christine Lagarde described the decision to hold rates as having been “unanimous,” she added that some Governing Council members had raised the possibility of following up June’s 25-basis-point hike with another increase at this meeting before agreeing to leave the Deposit Rate at 2.25%.
"It was a unanimous decision, but I'm going to qualify that because there were some governors who asked themselves, whether we should not consider a hike, in other words, raising the three interest rates on the occasion of that meeting," Lagarde told a news conference, adding that the ECB will closely look at data before deciding on its policy action at its September meeting. (See MNI SOURCES: Gulf Flare-Up Reinforces ECB September Hike Case )
In response to a question from MNI, Lagarde said the ECB’s reaction function is “very well understood by markets,” which currently price in two additional 25-basis-point hikes by the end of the year.
“The fact that it has been well articulated, that it's concise in its expression, that it can be understood, I hope, by all, but certainly by markets, I think, is a factor of stability in this very, very uncertain landscape in which we are trying to navigate ... so I really think that it is it is well understood," she said.
In a statement, the ECB said "uncertainty remains high and the full inflationary impact of the energy shock has yet to play out."
Inflation risks are now less balanced following the breakdown of the Middle East ceasefire, returning the ECB to a similar situation to that in which it found itself in June, Lagarde said.
LAGARDE IN JOB AT LEAST UNTIL 2027
Lagarde also said that she would remain in office until at least 2027, though refrained from confirming that she would fully serve out a term only due to end in October of that year.
"You are not going to see the back of me before 2027," she said. "When there are clouds on the horizon, the captain stays on the ship, and this captain is staying on this ship as long as there are clouds on the horizon.”
While there are no confirmed candidates to replace her, former Bank of Spain Governor Pablo Hernandez de Cos and former Dutch central bank chief Klaas Knot are said to be among the leading contenders. (See MNI: Spain To Support De Cos For ECB Head After Initial Doubts)
Jul-23 15:25
UK government spending plans lacked credibility even before Andy Burnham's promised policies, putting the new prime minister "firmly back in the box" that had constrained his predecessor Keir Starmer given commitments to the same fiscal rules and tax pledges, a former Treasury official and deputy governor of the Bank of England told MNI.
"The spending plans are not realistic in the later years, so the headroom [against the government's fiscal rules] doesn't really exist," John Gieve said in an interview.
Official spending plans assume real-terms cuts to most departments in 2028-29 right before the next general election is scheduled, said Gieve, who left the BOE in 2009 after having earlier served at the Treasury and as permanent secretary to the Home Office.
"I don't think they are credible. I don't think anyone believes that's what's going to happen,” he said. "They've got to find the money either from cuts in welfare, or alternatively from tax increases, and none of the sort of capital tax ideas which they've raised seem to me likely to lead to big money, especially not in the short term.”
Welfare cuts provide "scope for making reasonably quick savings," but it is unclear "whether or not [the governing Labour] Party will wear it," after a rebellion over proposed cuts to disability payments helped erode former Prime Minister Keir Starmer's authority in summer 2025.
"The strategic choice is: do they give themselves enough headroom for three years? I mean, put some taxes up, which raise tens of billions. And if you're going to raise tens of billions, the way to do it is to put a small amount on everyone, and that's the value of the big taxes," he said.
Otherwise, there "won't be a significant change in fiscal policy ... borrowing as much as we think we can get away with by promising to be better tomorrow.”
TAX MANIFESTO COMMITMENTS
Labour committed not to raise VAT, income tax or National Insurance contributions at the last election.
Before taking office on Monday, "Burnham has said that he'll stick to the fiscal rules and he'll stick to the tax pledges ... he made that perfectly plain and it's on the record. But it seems to me that the first major statement by the new Chancellor [John Healey] is the last time he can probably change those pledges this Parliament," he added.
Alternative revenue sources to the broad-based taxes ruled out in the budget would only make a marginal impact.
Revaluing property values or bringing in a land tax would take years, so "there's no magic there,” Gieve said.
"There are other ideas that have been mentioned which could raise a bit of money, but ... that's necessary just to keep the show on the road as it is now, and I don't think they'll find very much headroom in the fiscal rules to make game-changing extra spending commitments."
ALTERNATIVE FUNDING SOURCES
Under the Public Sector Net Financial Liabilities (PSNFL) measure used for the debt-to-GDP target, official loans can be netted out on the state’s balance sheet against the public spending they finance, which has led to an expansion of named activities such as the British Business Bank, but Gieve doubted this could prove a panacea.
"The Business Bank, which is being much expanded anyway ... is a route that Reeves has already gone down, but there may be room to get them to invest and to hold the investments on their balance sheet and thus get an offset in terms of the debt constraint. I think they will do that, and I think that's fine," he said. (See MNI INTERVIEW: UK Fiscal Rules Allow Loan Lift - ex-OBR's King )
"If you go back to [using Public Finance Initiative], and they may go back to the PFI ... I think that will be something that they're looking at very seriously," he said, adding that these schemes would still leave the government with additional debts in future.
Gieve does not believe it would be prudent for the government to bet on higher growth.
"It's always possible that the world economy will take a turn for the better, and the British economy will take a turn for the better, so that actually things aren't as bad when you get there. But unfortunately, recent experience is things could be even worse when you actually get there, and ... I think it's a bad gamble."
Jul-23 12:36
China is likely to accelerate the implementation of support measures and prepare additional incremental policies to address weakness in traditional industries amid the economic transition and uncertainty in the external environment, a prominent Chinese economist told MNI.
The economy is showing significant structural divergence with new growth drivers such as AI and green industries expanding rapidly and boosting exports, investment and production, while traditional industries remain sluggish, contributing to persistent weakness in domestic demand, said Guan Tao, global chief economist at BOC International. (See MNI INTERVIEW: Further Yuan H2 Appreciation Uncertain – Guan)
Pointing to Q2’s 4.3% GDP growth, down from Q1’s 5%, Guan noted this suggested AI-led industries have yet to offset weakness in traditional sectors fully. The recent correction in AI-related asset prices also highlight the uncertainty surrounding the country's new growth drivers, he added.
Counter-cyclical policy support remains necessary, Guan said, predicting the Politburo meeting later this month will emphasise full implementation of existing measures while signalling readiness to deploy additional policy tools if needed.
Given the constraints on monetary policy posed by weak credit demand and compressed bank net interest margins, fiscal policy will need to play a greater role through both the composition and scale of government spending, he suggested. To support weak traditional industries, fiscal funds should be directed toward key areas such as government procurement, employment subsidies, vocational training and social welfare, which would stabilise employment, and boost investment, and consumption, Guan continued. (See MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus）
K-SHAPE GROWTH
AI-related high-tech industries have become a major pillar of China's production and investment, reflecting the growth of the country's new engines, which is in line with China’s target of developing new quality productive forces, Guan said, citing H1 data from National Bureau of Statistics that showed new sectors, including high-tech and digital product manufacturing, contributed 47.9% to the growth of industrial value-added output, an increase of 12.0 percentage points.
In the first five months, profits in high-tech manufacturing grew by 44.7%, contributing 8.0 pp to the overall profit growth of industrial enterprises above designated size. At the same time, the AI industry has become a major driver of exports, increasing China’s reliance on the sector, he said.
According to Customs data, integrated circuits have been the largest contributor to export growth. Combined with automatic data-processing equipment and related components – including laptops, servers, motherboards and memory chips – they accounted for 50.5% of the increase in total exports during H1.
As trade expanded much faster than nominal GDP, China's trade dependence ratio – total imports and exports as a share of nominal GDP – rose to 35.45% in Q1, up 3.1 pp from a year earlier and the second-highest level since Q2 2015, he highlighted. On the other hand, industries with limited exposure to AI have benefited far less from the export boom, contributing to the widening gap between strong macroeconomic indicators and weaker conditions experienced by many businesses, Guan argued.
Traditional sectors are still facing strong supply and weak demand as the value-added industrial output grew by 5.4% year-on-year in H1, while retail sales increased by only 1.3% over the same period, widening the gap to 4.1 pp, compared with gaps of 2.3 and 2.2 pp in the previous two years, respectively. As a result, the capacity utilisation rate of industrial enterprises in the second quarter fell by 0.6 pp quarter-on-quarter to 73.0%, marking the third-lowest level on record, he warned.
Guan also believes further yuan appreciation in H2 remains highly uncertain.
Jul-23 07:09
Sustained yuan appreciation in the second half remains highly uncertain, a prominent Chinese economist told MNI, warning the Federal Reserve's hawkish stance and renewed tensions in the Gulf are likely to cap further gains.
Guan Tao, global chief economist at BOC International, said in an interview that the yuan's recent performance resembled its trajectory in 2021. The currency appreciated 9.3% against the U.S. dollar between June and December 2020 before stalling around 6.37 the following year, then entered a prolonged period of depreciation as stronger-than-expected U.S. growth and rising inflation fuelled expectations of Fed tightening, while the China-U.S. yield differential narrowed and the dollar strengthened.
In the first half of this year, the U.S. dollar index rose 3%, while the yuan central parity strengthened 3.2% against the greenback and the onshore yuan appreciated 3%, outperforming the offshore yuan's 2.7% gain. The CFETS RMB Index, which measures the yuan against a basket of major currencies, also rose 4.7% to 102.59, its highest level since August 2022. (See MNI INTERVIEW2: Yuan To Rise Against Euro Amid Forex Tensions)
TWO-WAY VOLATILITY
Guan expects two-way volatility to intensify in the second half as domestic and external uncertainties increase. In the near term, AI-related industries should continue supporting China's economy and capital markets, China-U.S. trade relations are likely to remain broadly stable and the trade surplus should stay large, all of which are supportive for the yuan.
However, significant headwinds remain. The Fed's hawkish stance could widen the China-U.S. interest-rate differential further after spreads between U.S. and Chinese two- and 10-year government bond yields widened by 74 basis points and 44bp in the first half. Foreign investors have continued reducing holdings of yuan-denominated bonds since the second quarter of 2025. The renewed Iran conflict has also boosted dollar demand, weighing on non-dollar currencies. The greenback could strengthen further in H2, while the possibility of additional U.S. tariffs on other countries remains another important source of uncertainty for the yuan, Guan said.
Although AI-driven industries are emerging as new growth engines, they have yet to offset weakness in traditional sectors. China's economy remains in a difficult transition, while foreign investor confidence in Chinese assets needs to be further promoted. Balance of payments data show average quarterly net foreign capital inflows of just USD5.2 billion between Q2 2025 and Q1 2026, well below the USD158.5 billion average recorded between Q3 2020 and Q1 2022 during the previous period of yuan appreciation, he noted.
Guan also warned that a stronger yuan would generate exchange losses on both China's trade and financial accounts, creating a macroeconomic tightening effect the country has never experienced, as the private sector shifted to a USD254.9 billion net external asset position at the end of Q1 from net external liabilities of USD1.21 trillion at the end of 2021, while the country's trade surplus continued to expand.
Given the market's sensitivity to further yuan appreciation, authorities should strengthen monitoring of capital flows, stabilise expectations and guard against exchange-rate overshooting, Guan said.
UNRELIABLE PPP GUIDE
One argument supporting further yuan appreciation is that the currency remains undervalued on a purchasing power parity (PPP) basis. (See MNI INTERVIEW: Yuan In Steady Upward Trend - Sheng Songcheng)
But Guan questioned the usefulness of PPP as a guide to short-term exchange-rate movements. The Japanese yen, for example, has been more than 30% undervalued relative to PPP since 2023, yet it has continued to weaken to near four-decade lows despite the Bank of Japan's rate-hiking cycle.
More broadly, market exchange rates do not necessarily converge toward PPP. Asian currencies including the Singapore dollar, South Korean won and New Taiwan dollar have remained persistently undervalued relative to PPP over the past three decades, with estimated undervaluation still ranging between 40% and 60% last year, Guan said.
Jul-23 06:47
The Bank of Japan has become less convinced it needs to wait for the full effects of higher interest rates to feed through the economy after June's hike failed to produce the degree of restraint on economic activity and financial conditions bank officials had expected, increasing the possibility of another rate increase as early as September, MNI understands.
BOJ officials had previously viewed an early rate hike as risking the achievement of the 2% inflation target in a stable and sustainable manner. They have since changed that assessment as upside risks to prices have increased.
Officials have been surprised by the limited impact of the move to 1.0% on the economy, with ample liquidity, solid bank lending and robust corporate profits continuing to cushion businesses from higher borrowing costs and adding to pressure to prices. While officials believe it takes several months to assess the effects of the June increase, they have yet to observe any meaningful tightening in economic activity or financial conditions.
Banks continue to expand lending, companies are maintaining strong investment plans despite higher borrowing costs, and the yen has weakened beyond JPY163 against the U.S. dollar. (See MNI POLICY: Weak Yen Adds Risk To BOJ's Policy Direction)
POLICY SHIFT
The BOJ's June policy statement, which warned that underlying CPI could overshoot the bank's 2% target, reflected a shift in policymakers' assessment. Whereas they had previously judged the risk of taking a wait-and-see approach before raising rates further to be limited, they now increasingly view the risk of delaying additional tightening as significant, adding pressure to accelerate the pace of rate hikes.
Companies continue to pass higher costs on to consumers, while cost pressures are likely to intensify as higher crude oil prices and the yen's renewed weakness feed through to consumer prices with a lag. (See MNI POLICY: BOJ Sees Resilient Spending Able To Weather Hike) At the same time, rising bankruptcies are being driven primarily by labour shortages rather than higher borrowing costs, while weaker housing investment reflects elevated construction and labour costs that have pushed up home prices, rather than the impact of higher interest rates.
Taken together, these developments suggest the policy rate has yet to reach a sufficiently restrictive level to moderate demand. Policymakers increasingly believe rates may need to rise further before they begin to curb capital investment and materially tighten financial conditions.
However, whether the BOJ raises rates in September remains uncertain, with the timing of future moves also likely to depend heavily on the government's policy stance. Markets have priced in a 33% chance of a September hike and a 1.28% policy rate by December.
Jul-23 02:12
Federal Reserve Chairman Kevin Warsh's star-studded task forces face heavy lifting to overcome institutional inertia and win over skeptical members of the FOMC.
While some of Warsh's top policy priorities like revising or scrapping the Summary of Economic Projections and shrinking the Fed’s balance sheet have broad support, the notion of relying more on novel indicators or revisiting the inflation framework will likely face stronger resistance -- especially after the FOMC dropped flexible inflation targeting to return to a more traditional regime less than a year ago.
To keep the panels from reinventing the wheel, each task force is supported by two staffers -- one from a regional Fed bank and one from the Fed Board, MNI understands. Their job is to ground the outside experts in baseline technical data and past debates.
The task forces start briefing the committee as early as September, with conclusions due by the end of 2026. But they can only make recommendations to the FOMC, which alone decides what changes, if any, are adopted.
"Ultimately, decisions will be made by my FOMC colleagues," Warsh told Congress last week.
WELL-TRODDEN GROUND
Convincing Fed insiders will be tough because many view Warsh's five lines of inquiry as well-trodden ground. The Fed has already done extensive work on these topics, some of it stretching back years. At the same time, subjects like AI and productivity involve too many unknowns to impact near-term policy.
And the task forces were designed and selected with little input from other FOMC members.
Still, the perceived legitimacy of the prominent scholars, business leaders and central bankers picked to lead the task forces, together with their broad range of views, should lend weight and credibility to the recommendations and give Warsh leverage. And the most significant reforms are expected to come in communications and the balance sheet, areas already earmarked for changes after the missteps of the pandemic.
REFORMS UNDERWAY
Modifying or scrapping the dot plot has been debated for years, and Warsh is finding broad support among colleagues for ditching forward-looking statements. But real reform means clarifying how the Fed explains its reaction function, not just saying less.
Scenario-based analysis could better communicate how policy might react under uncertain conditions and is likely to be among recommendations from Peter Fisher, Arminio Fraga and Mervyn King. But finding consensus across 19 committee members will remain a challenge, especially with officials increasingly protective of transparency and a regional diversity of views. (See MNI INTERVIEW: Fed Regional Banks Key To Independence - Judge)
Reducing the balance sheet is another discussion well underway inside the Fed, with staffers and policymakers converging on the idea that size should follow function and regulatory changes will have the most impact.
Karen Dynan, Raghuram Rajan and Jeremy Stein are likely to recommend keeping the ample reserves framework and to float ideas to reduce banks' appetite for reserves. Warsh himself conceded last week that any portfolio reduction will move slowly and deliberately to avoid market dislocation. (See MNI POLICY: Fed Prepares Balance Sheet Options For Warsh)
DATA DOUBTS
The data task force faces potentially the steepest climb. Warsh argues that relying on public data is akin to driving using the rearview mirror. But adopting a shiny new dashboard of more forward-looking indicators would face a problem of optics.
Officials fear basing monetary policy decisions on non-public information risks damage to trust and could lead to the erroneous perception that the Fed holds secret information not available to investors, making market reactions to economic reports more volatile.
Staff economists' use of alternative data has also grown for years as the Fed folded in private statistics, granular spending data and its own surveys to sharpen its read on the economy. Like many private investors, the Fed has picked over proprietary and alternative datasets since the pandemic, but sampling biases and missing seasonal adjustments remain persistent hurdles.
Jul-22 15:53
The European Central Bank is set to leave policy rates unchanged Thursday, as policymakers take stock of a return to conflict in the Gulf region and surging energy prices, before what is likely to be an additional 25-basis-point rate hike in September.
Market pricing and economists are largely in line with recent ECB speakers in suggesting July will see the Governing Council leave rates on hold at 2.25%. Latest pricing sees only 1.5bp of hikes priced for tomorrow, but 23bp are priced for the September meeting.
The recent resurgence in energy prices could mean that some members of the Governing Council could this week make a more forceful argument for following up June’s 25bp increase with another hike this week, but they will almost certainly be in the minority. (See MNI SOURCES: Gulf Flare-Up Reinforces ECB September Hike Case )
NO GUIDANCE
Given President Christine Lagarde's June 29 Sintra speech stepping back from forward guidance and offering a newly defined "framework guidance", the official policy statement is unlikely to offer much from previous commitments to a data-dependent, meeting-by-meeting approach with full optionality and no set rate path. (See MNI SOURCES: ECB September Meeting 'Live' Despite Iran Deal)
However, Lagarde's description in the press conference of the balance of risks and how the inflation outlook compares to the staff's projections and scenarios could provide additional nuance.
Recent data has been fairly benign, providing the Governing Council with justification for a hold this week. Euro area inflation slowed to 2.8% in June and growth was a fairly solid 0.3% q/q from Jan-March when stripping out volatile Irish data. The ECB’s bank lending and access to finance of enterprise surveys this week showed little to suggest imminent second round inflation.
Jul-22 15:20
Federal Reserve officials will likely look through a recent spike in inflation, viewing it as a temporary product of passing supply shocks, and refrain from raising interest rates this year, former Fed Governor Stephen Miran told MNI.
“I still am inclined to think that they will do the right thing, which is to look through the temporarily higher inflation,” Miran said.
He said investors worried about a string of rate hikes are too focused on the hawkish dots in the June Summary of Economic Projections, as well as pronouncements from more hawkish members of the committee, particularly in light of Chairman Kevin Warsh’s light-touch approach on communications.
“The market is overkeyed to those dots, and I also think the inflation data are going to start coming in better over the remainder of the year,” Miran, now back at hedge fund Hudson Bay Capital, said in an interview.
“What's happened is the chairman has decided not to provide any forward guidance whatsoever, which means that only the people who are willing to provide forward guidance are able to communicate that guidance to the markets.”
Miran, who stepped down from the Fed’s Board of Governors in May, said he would have submitted a June dot calling for two rate cuts because he believes that price pressures are actually subdued.
Still, he concedes that “there are clearly people who want to hike,” adding that “they may end up cutting late this year if the inflation data come in well over the second half, but that would depend on the data. Certainly right now it seems a big hurdle.” (See MNI INTERVIEW: Fed Expected To Cut Rates Late In 2026- Ireland)
INFLATION MISMEASURMENT
A key element of Miran’s dovish view is his research on how the most widely used measures of inflation could be painting an overly hot picture that is not in keeping with reality, particularly with regards to portfolio management services and software prices.
“The PCE is measuring quantities and labeling it as prices because the stock market was up and AUM was up. That's not an actual price increase. Trends in the asset management industry have been in deflation for decades,” he said.
In software, he flagged a “composition bias" that overstates demand for software and accessories and extrapolates demand concentrated in AI to household spending more broadly. Miran noted the inversion of a longstanding trend of CPI being higher than PCE is indicative of some of those anomalies, which he thinks should forestall any policy reaction.
"A decision to pursue higher interest rates in order to compensate for measurement error to bring lower inflation elsewhere in the basket -- because the measurement error is an implicit reduction of the inflation target and it also effectively asks Americans to lose their jobs to offset statistical anomalies -- to me is a bit of a grotesque interpretation of the word stable prices," he said.
MONETARIST VIEW
Miran has just co-authored a paper that tries to rekindle interest in monetary aggregates among central bankers, noting that Warsh has pushed back against the idea that money does not matter for monetary policy.
“As I try to get a handle on how Chairman Warsh thinks, it became very clear to me that he's somebody who takes money supply seriously and monetarism seriously in a way that I think a lot of people at the Fed haven't in a long time,” he said.
His paper finds that rather than becoming less reliable over time, as Fed officials had concluded, monetary aggregates were simply not being measured adequately as the financial system evolved with the creation of savings vehicles like money market funds, which are money-like but not exactly cash instruments.
New measures developed by other economists try to weight the money supply by how “money-like” different types of financial instruments are. “When you do that, the models regain their predictive power,” said Miran.
Currently, those measures are showing monetary policy is close to neutral, the paper finds. “So the idea that it's somehow important to pull a Volcker when inflation is very likely going to normalize on its own accord is to me not the best policy.”
Jul-22 12:04
Renewed conflict in the Persian Gulf is consolidating the case for further tightening by the European Central Bank, Eurosystem sources told MNI, but while some hawkish Governing Council members are likely to make the case for a back-to-back rate hike this week after June’s move, waiting until September remains much more likely.
At least a few officials are expected to raise the argument for acting now, capitalising on the spike in oil prices to press for an earlier move than the September consensus implies, sources told MNI.
“I'm sure some of my more hawkish colleagues will be looking at perhaps doing what we may have to do now. They will argue 'if we think a September hike is necessary, lets hike now - why wait',” one national central bank source said. “It isn't a view I hold and I still see the vast majority of the GC as ready to wait for September.”
The view was echoed by another Eurosystem source, who “wouldn't be surprised if some of the hawks made a point of calling for a hike now rather than later.”
Still, the case for waiting remains stronger, the source said, casting doubt on any suggestion that data now portrays a significantly different inflation outlook to June’s.
“We are close to the baseline scenario, so no real surprises for us. We can sit back on our Framework Guidance and assess data over the summer,” another Eurosystem source said.
It is unclear whether any hawks arguing for a hike at Thursday's meeting would push strongly enough to record a formal dissent, which would break the Council’s recent run of unanimity, officials noted.
"Worst case scenario I could see a non-unanimous decision," one official said. "But my sense is that we need to project the impression of cooler heads being around the table and not people reacting to instant news." (See MNI INTERVIEW: ECB 'May Have To Do A Little Bit More' - Wunsch)
SEPTEMBER BASELINE
For most officials, the firmest analytical ground for policy decision will have been laid by September’s meeting, which will be accompanied by new staff projections.
“Certainly we believe another 25 basis points will be needed in September if nothing changes dramatically," one source said.
In the meantime, Thursday's messaging is expected to be tightly controlled, in line with the ECB’s insistence on its data dependent, meeting-by-meeting approach, and pointing to its three-pillar reaction function as well as the framework guidance outlined in President Christne Lagarde's Sintra speech as a template. Statement and press conference will emphases full optionality and no clear rate path ahead. (See MNI INTERVIEW: ECB Strategy For Uncertain Times -Kazaks)
Still, Lagarde is expected to keep September firmly in play for a possible rate hike, if only by not taking it off the table.
Though officials told MNI that a hike at September’s meeting is extremely likely, one cautioned against any clear signalling, due to the elevated uncertainty.
"Conditionality is key when discussing possible moves, as uncertainty at present sees wide variations from day-to-day, let alone week-by-week, or month to month" another policymaker said.
An ECB spokesperson declined to comment.
Jul-21 16:05About
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