The UK seems obsessed with focusing on inflation, whereas the fed is dealing with labour market issues & growth
23 September 2024, 09:48 | Updated: 23 September 2024, 09:54
Despite a few metaphorical bumps in the road, the ‘good and the great’ from Labour gather this week in Liverpool to fawn over its leader, Sir Keir Starmer, who will be extolling the virtues of his aspirations and dreams for a dramatic ‘CHANGE’ in political ideology - Whatever that means.
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We are all pleased to constantly hear reference to growth, even though Labour’s plans appear to be still in an embryonic state. I suppose this is fair enough considering the public has only been exposed to this fresh, exuberant and optimistic government for two months. However, there is little sign of Starmer’s storm troopers hitting the ground running!
Despite the ballyhoo over the alleged ‘gifts fiasco’, which has grabbed the headlines this last week, Deputy PM Angela Rayner gave a good account of herself on Sunday on her plans to ease the desperate housing crisis, with an ambitious target to build 1.5 million homes by the end of this Parliament. I think she will face far greater legal challenges than she gives credit for, regardless of her proposed legislation.
Labour secured a majority of 174 in July’s General Election, despite only garnering 33.4% of the votes cast, which must be close to being unprecedented. 9.7 million voted Labour, 6.5 million Tory, 4.1 million Reform, 3.5 million Lib Dem and Green 1.8 million – Assuming a coalition, Labour/Lib-Dem/Green voters would have totalled 15.6m plus a few hundred thousand Sinn Fein and Plaid Cymru (circa 400k) = 16 million - Conservative and Reform totalled 10.6 million.
A labour majority of that magnitude is perhaps unrepresentative. However, the UK has a ‘first-past-the-post’ election system. For a government to be all but omnipotent, the general support for their policies is far from obvious, starting with the withdrawal of the Winter Fuel allowance, apart from the very needy and the spiteful imposition of 20% VAT on private schools, which was a political decision and not an economic necessity.
The Budget on 30th October is eagerly awaited to put an end to speculation as to what Chancellor Reeves might or might not do. Whatever comes out of her ‘Pandora’s Box’ is unlikely to satisfy the better paid or those with valuable assets.
Due to the Bank of England’s alleged comment that it would slow down the sale of government bonds (Gilts), the Treasury could find itself £10 billion better off than the Government thought it might be. However, Mrs Reeves, in an interview with The Sunday Times, says ‘she does not recognise the numbers at all’ and appears resolved to crack on implementing her fiscal disciplines. Suffice to say that we have had sufficient speculation for the time being.
By the time this missive reaches its home on LBC’S website, readers will have finished their Cornflakes and will be into the nitty-gritty of the Labour Party Conference. This gives me a chance to suggest we all consider the Western World’s global approach to interest rates. The Bank of England’s MPC cut rates in August by 0.25% to 5%, the first cut for 4 years, with inflation falling sharply from 11.1% to 2.2%.
The Bank appears to be obsessed with killing inflation stone-dead, returning to its 2% guideline; hence it did not follow the ECB’s cut two weeks ago. On September 18, 2024, ECB lowered its interest rates, including the deposit facility rate, the main refinancing operations rate, and the marginal lending facility rate, decreasing it by 25 basis points to 3.5%. The main refinancing operations rate was decreased by 60 basis points to 3.65% and the marginal lending facility rate to 3.90%, in response to a drop in inflation and increasing signs of weakness in the eurozone economy over the summer.
The US Federal Reserve’s decision to cut interest rates by 50 basis points rather than the expected 25 points last week came as a bit of a surprise. The US central bank had telegraphed the decision to cut for weeks, as it made inroads to cut inflation and is now more concerned about preventing a slowdown in the economy. Labour Market has shown signs of weakness in recent months, with quarterly earnings coming in short of expectation in places
Even for such an illustrious institution marked by its independence, the Fed’s timing is irritatingly awkward. The Fed’s first rate cut in four years is too close for comfort to the climax of a US presidential contest that may hinge on how voters feel about the economy as they express exasperation with increased prices and the higher borrowing costs helping to bring inflation to heel.
There is a risk that cutting rates will look to a host of people, many bystanders, as well as the uninitiated lay person, that the Fed is trying to improve the economy, prior to the election. The Fed needs to be cognisant and sensitive as to potential accusations to bias.
What has surprised ‘Fed watchers’ is the potential guidance Chairman Jay Powell, and his colleagues have suggested to the markets. Two further cuts this year are possible, maybe two 25 basis points cuts, and the Fed expects rates to fall to 2.9% in 2026. What sort of a crystal ball does the Fed look into? Will it be game over in Russia and the Middle East? The political imponderables still loom large.
Finally, the Bank of Japan kept interest rates steady last week and Governor Ueda said it could afford to spend time eyeing the fallout from global economic uncertainties, signalling it was in no rush to raise borrowing costs further. He said Japan's economy was moving in line with forecasts, with rising wages lifting consumption, and keeping inflation on track to durably hit the bank's 2% target. Japan has enjoyed a zero-rate policy since 1999. Despite its massive debt – 263% of GDP, the Japanese have been incredible savers on a personal basis.
The Fed, the MPC and ECB cherish their independence fiercely and rightly so. However, many feel it is time to throw caution to the wind and help their flagging economies rather than obsessing over inflation. I hope the Bank of England joins the party sooner rather than later.
