ALEX BRUMMER: Powell pulls his punches at the Federal Reserve

Powell pulls his punches: The Fed and the US Treasury have ridden roughshod over post 2008 crisis rules, says ALEX BRUMMER

Federal Reserve decision-making has become more complicated. 

Last night’s move by the US central bank to raise its federal fund rate by a quarter of a percentage point to the 4.75 per cent to 5 per cent range comes against a complex background.

Fed chairman Jay Powell has been relentlessly raising interest rates to bring inflation down from the peak of 9.1 per cent in June 2021 to 6 per cent in February.

Rate hikes: Fed chairman Jay Powell has been relentless raising interest rates to bring down inflation from the peak rate of 9.1% in June 2021 to 6% in February

Rate hikes: Fed chairman Jay Powell has been relentless raising interest rates to bring down inflation from the peak rate of 9.1% in June 2021 to 6% in February

Earlier this month, the Fed had been expected to unfurl at least another half-point rise.

The banking crisis that started at Silicon Valley Bank and spread to First Republic, Credit Suisse in Europe and US regional banks, has changed all that.

In spite of America pumping $300billion into the banking system to stabilise the system, the Fed chairman acknowledged that financial conditions have tightened.

In other words, a potential credit crunch, where business and personal borrowers find it harder to get loans, will slow output and place downward pressure on inflation.

Throughout the current crisis the European Central Bank and the Bank of England have sought to argue that the battle against higher prices and financial stability are on different tracks.

Powell last night acknowledged that banking difficulties are changing the outlook for the US and global economy.

The Fed and the US Treasury have already ridden roughshod over post-2008 crisis rules which ruled out blanket bailouts.

The Bank of England argues that this exposes the banking system to ‘moral hazard’. In other words, depositors and banks can rely on a rescue even if mistakes are made.

With so much uncertainty the Fed is now much more ambiguous about what happens to rates next.

Given the degree of turbulence, Powell and his colleagues might have been wiser to pause on higher official rates rather than adding to the risk of a growth shock.

Bailey’s turn

The Fed has done its stuff and today it’s the turn of Andrew Bailey and the Monetary Policy Committee (MPC).

Under normal circumstances, the Bank would have no choice but to hike rates.

An inflation rate of 10.4 per cent on the consumer prices index in February was a shock amid expectations the peak had passed.

The MPC is under pressure to bring inflation down to its 2 per cent target before the end of 2023 and Rishi Sunak has promised to halve it this year. 

It may be harder than thought given that ‘core inflation’, which excludes oil and food costs, is still rising at 6.1 per cent.

Freak factors may have played a part in the February surprise. A lack of tomatoes and fresh vegetables had a big role.

We still await the dramatic drop in fuel prices to moderate the index. When these items fall out of the CPI, we can expect a steep and early decline in the cost of living.

Unfortunately for the Government, it is possible that the delayed fall in prices may over-excite trade unions that are showing signs of suing for peace on the wages front.

Britain’s people-led services economy is particularly sensitive to leaps in earnings.

We should never take one month’s data too seriously. Former MPC member David Miles told the Commons that when high energy prices have flushed through the cistern, the Office for Budget Responsibility projection of 2.9 per cent inflation this year could well prove too high.

The Bank does its best to isolate financial stability decisions from monetary policy as we saw with the liability-driven instruments eruption last Autumn. MPC members will be only too aware that banking stresses can dramatically change monetary conditions.

In the aftermath of the Northern Rock collapse in 2007 there was a credit crunch and banks stopped lending. That’s why the Bank needs to take its foot off the brakes and postpone the march to higher rates.

Power play

In one giant leap for humankind, Centrica chief executive Chris O’Shea has gone from one of the least well-paid in the FTSE 100 to joining the high fliers with a £4.49million pay package including deferred bonuses.

The British Gas owner is a big beneficiary of the surge in gas and power prices and is working hard to improve the UK’s energy security. 

That will not make his bulging wage packet any more palatable to households struggling to meet bills or less-well-off customers whose homes were violated by debt collectors.