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Post-pandemic recovery is officially canceled

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This article is an on-site version of Martin Sandbow’s free lunch handout. Participation over here To get our newsletter sent directly to your inbox every Thursday

I wrote last week The International Monetary Fund has often been at the forefront of economic paradigm shifts over the past ten to fifteen years. But the annual meetings of the International Monetary Fund and the World Bank this week show that the fund could also be in the midst of an unreconstructed mainstream. One of the messages that came very clearly from the International Monetary Fund this week is that while the economic outlook is very uncertain, central banks must act decisively against inflation. The fact that the ongoing strong monetary tightening is about to end one of the strongest labor markets in living memory, as I wrote in my article column this weekHe doesn’t have much weight in Washington. The Fund goes beyond simply calling on central banks to “stay the course” – it also wants fiscal policy to support them in constraining aggregate demand.

Rational people can disagree about the correct macroeconomic position, but I want to touch on some of the slow-motion arguments I’ve heard over the past week. Here are four:

First, monetary policy is claimed to remain at stimulus levels rather than neutral, let alone restrictive. This claim is lazy simply because it presupposes that because absolute levels of central bank interest rates remain low by historical standards, it means monetary policy is loose.

This ignores that central banks’ target rates affect the economy by influencing the overall financial conditions facing businesses and households. Ultimately, these conditions must be adequate to achieve the policy objectives of central banks, which is why good central banks must adjust their instruments to what financial markets do on their own. For example, if moderate tightening is seen as necessary, and financial market conditions become more stringent for other reasons, there is no need to raise interest rates for the central bank (unless market tightening occurs just to anticipate such a move).

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In general, a low central bank rate should not be viewed as a stimulus, if it allows for contracting public financial conditions. This is the case today. International Monetary Fund Global Financial Stability Reportthis week, documents show that financial conditions in all advanced economies are slightly tighter than their 25-year average, and much tighter than they have been at any time in the past decade except for the start of the pandemic.

IMF Financial Conditions Index

Another lazy argument is that because of rising inflation, real central bank policy rates have fallen. So central banks have to act just to sit idly by, and raising interest rates may not amount to a tightening. But again, central banks have influence through their effect on the behavior of people throughout the economy. Nobody chooses an investment based on the “spot” real interest rate (the shorter-term central bank rate minus this month’s inflation). They rate the true rate over the lifetime of their rating. And on any significant time horizon in the real economy, real rates have risen a lot.

The fund’s GFSR found that real rates have risen by about one percentage point since April for five- and 10-year government borrowing in the United States, and closer to 1.5 points for the eurozone. It also means that the “five-year, five-year” real rate – the cost of borrowing five years starting five years from now – has risen about the same. Someone is planning to purchase, for example, energy efficiency equipment – a heat pump? electric car? – In the coming years it now faces much higher financing costs after inflation. As it happens, the fund reports that even one-year real interest rates have risen significantly (see chart below).

Short-term nominal interest rate minus one-year core inflation

The third lazy argument is that central banks cannot target long-term interest rates, a policy known as “yield curve control” (YCC). It will destroy their credibility as inflation fighters by making it appear that they are taking orders from profligate finance ministers to cut public borrowing costs. Therefore, the YCC will complicate the monetary tightening that most central banks now think (wrong, in my view) they need to do.

Put aside the obvious problem that the only central bank doing YCC business is the one with the least inflationary pressure (the Bank of Japan). The bigger problem is that this objection to the YCC is based on two mixtures. The simplest is the intellectual error of confusing the idea of ​​targeting long-term interest rates with the risk of targeting them at the wrong (too low) level. But there is nothing to prevent a yield curve-controlling bank in a stressful mood from raising long-term interest rates to any level that tightens financial conditions sufficiently.

However, this points to the second and more fundamental confusion. The Bank of England’s emergency interventions in the past two weeks show that while it has been very careful to say it does not want to direct the cost of long-term borrowing to the UK government, in practice it has very strong views of gold yields. I clearly found that gold yields rose very quickly and very high after the government’s “mini” budget (otherwise why would it interfere?). So there is a contradiction between what you want and what you say you want. But there is also a contradiction between the different things he wants – to contain gold returns for reasons of financial stability, and higher returns for reasons of monetary policy. But since he’s not officially targeting gold returns in the long term, he didn’t have to make a decision. No wonder the markets are swinging.

The Old Lady on Threadneedle Street is just the most extreme example. Other central banks risk the same confusion. Perhaps the original sin here was to choose quantitative easing (QE) – buying government bonds – rather than controlling the yield curve in the global financial crisis: central banks opted for a policy that was clearly intended to lower yields but refused to place it. I think returns should be reduced to. It is understood that the Bank of Japan, which started QE long before anyone else, is the only central bank that chose the YCC and stuck with it. Others will find that this confusion of treating long-term yields as values ​​that should not be named will only get worse as QE turns into QE – as shown by the Bank of England’s forced postponement of bond sales this month. I argued last year that the European Central Bank should adopt yield curve control; The argument applies to other central banks as well.

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What do we conclude, finally, from the IMF’s insistence that fiscal policy should not operate “inconsistent with monetary policy”? This view – not at all unique to the fund – breaks with tradition in two important ways. One thought. Part of the way central bank independence was supposed to function was the division of labor with the finance ministries. Elected politicians will make the policy decisions of fiscal policy, about who pays and who gets what — which certainly includes how spending and taxes are distributed among current and future generations of taxpayers, also known as the deficit. Monetary technocrats will then use interest rates to stabilize the economic cycle. Now, it seems that financial decisions should be subject to monetary decisions.

The newest tradition is barely two years old: It wasn’t long ago that governments around the world launched recovery plans to rebuild their economies from the pandemic (even “build them back better”). But it now appears that the priority is to rein in growth. Telling fiscal policy to support monetary policy in containing aggregate demand only makes sense if the economy is above its sustainable potential, in other words, there is no more damage from the pandemic left for macroeconomic policy to heal. So goodbye to post-pandemic recovery, it was good to know you, but for a while.

Other readings

  • The Nobel Prize in Economics was awarded for this work Still relevant frustrating: Why is there a run on banks and the extent of the damage to the economy.

  • Gábor Mészáros and Kim Lane Scheppele convincingly demolish any illusions On Hungary’s rush to create an “integrity body” to avoid being cut off from EU funds based on a flawed rule of law.

  • Mine Explanation Two weeks before the turmoil that followed Britain’s “mini” budget, the realization was that the government really believed in a new Thatcher theory of what creates economic growth, which market participants have long dismissed as false. My colleague Helen Thomas has Excellent column About how the same alienation occurs in the business community.

  • The FT’s special report On “Women in Business”.

news numbers

  • there 10 percent risk The global economy has contracted, according to the International Monetary Fund’s Global Financial Stability Report.

  • Behind the numbers FT . readers participate How is the cost of living crisis affecting them?

Lex Newsletter – Follow a message from Lex Centers around the world every Wednesday, and review the best comment of the week every Friday. Participation over here

unenclosed Robert Armstrong explains the most important market trends and discusses how the best minds on Wall Street respond to them. Participation over here


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Economic

Coinbase says Apple blocked latest app release on wallet NFTs by Reuters

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© Reuters. FILE PHOTO: A representation of the cryptocurrency is seen in front of the Coinbase logo in this illustration taken March 4, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

(Reuters) – Coinbase Global Inc said on Thursday that customers using Apple Inc’s (NASDAQ::) iOS will no longer be able to send non-fungible tokens (NFTs) to its wallet.

Coinbase (NASDAQ:) added in a tweet: “Apple’s claim is that gas fees required to send NFTs must be paid through an in-app purchase system, so they can charge you 30% of the gas fee.”

The 30% fee has been a point of contention between the world’s most valuable company and other app developers like Spotify (NYSE: ) and “Fortnite” maker Epic Games, which has accused the company of abusing its “monopoly.”

Apple did not immediately respond to a Reuters request for comment.

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UK regulator to investigate rising mobile phone and broadband prices

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The UK’s telecoms regulator has launched an investigation into whether telecoms companies were upfront with customers about price increases in a contract after complaints of a lack of transparency.

Ofcom will study whether mobile and broadband service providers made customers who signed a deal with the company between March 2021 and June 2022 sufficiently aware of changes to their pricing terms.

As inflation soared as the cost-of-living crisis intensified, telecom groups collapsed audit From the regulator and politicians about whether they acted enough to support struggling families and broke the rules of transparency. UK inflation hit a 41-year high of 11.1 percent in October.

Most operators chose to significantly increase their prices above the rate of inflation earlier this year, which boosted core revenue. For example, BT, Vodafone and EE raised their prices in line with the CPI, plus 3.9 percent.

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Ofcom He said he was concerned that such intra-contract price differences were not “sufficiently prominent or transparent” at the point of sale, as required by the regulator’s rules. If cases of non-compliance are identified, Ofcom may initiate an investigation into said operators.

said Lindsey Fossell, group director of regulator networks and communications.

Ofcom’s latest affordability report, published on Thursday, found that 32 per cent of households had problems paying for phone, broadband, pay TV or broadcast bills – more than double the level of April 2021.

It also found that 17 percent of households are currently cutting back on other spending, such as food and clothing, to afford telecom services — up from 4 percent in June 2021.

Dana Toback, chief executive of Hyperoptic, a broadband provider that chose not to raise its prices above inflation rates this year, said Ofcom’s investigation was “a huge step forward in preventing the consumer from harm caused by higher mid-price contracts”.

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This year’s Hyperoptic survey found that 60 percent of people were unaware that the price of their broadband would increase mid-decade.

“We work hard to make sure that the annual price increase is clearly defined and discussed at each registration or renewal,” said BT, which also owns EE, adding that the company also showed customers how price changes worked in the contract.

“We follow industry best practices, and will participate fully in the Ofcom programme,” she said.

Vodafone did not immediately respond to a request for comment.

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Georgieva of the International Monetary Fund to discuss the economy and Covid with Chinese authorities via Reuters

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© Reuters. International Monetary Fund Managing Director Kristalina Georgieva attends a press conference following a meeting at the Federal Chancellery in Berlin, Germany on November 29, 2022. REUTERS/Michel Tantosi

NEW YORK (Reuters) – International Monetary Fund Managing Director Kristalina Georgieva said on Thursday that she will travel to Beijing next week with heads of other international institutions to discuss China’s economic outlook and COVID-19 policies with the country’s leadership.

“This is the first time, and we hope we can sit down together and discuss the very pressing issues facing China and the world,” Georgieva told the upcoming Reuters conference.

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