Powell Jackson Hole may be difficult to "release the pigeon"! New survey of Industrial Investment: The Federal Reserve has not yet overcome the inflation problem

If a year ago, the world's major central bankers had a choice of today's economic situation: inflation downgraded from a crisis to a minor problem, unemployment remained low, and growth slowed but not stagnated, they would have accepted it without hesitation.

But that does not mean that anyone will declare mission accomplished at the central bank's annual meeting in Jackson Hole this week.

One of the fragile backdrops facing this year's conference is that the United States is the top performer of all major economies, but according to the latest survey,Two-thirds of the 602 US respondents said the Fed had not yet overcome the inflation dilemma.

Powell and others cannot be sure that they have raised interest rates enough to keep prices in check. They do not even know how much longer austerity will continue, which is increasingly becoming a major problem in financial marekting.

Jerome Schneider, head of short-term portfolio management and treasury at Pimco, said:

"We are likely to be in a risk-free base rate environment of more than 5 per cent for the foreseeable period, perhaps through mid-2024 or beyond."

To the brink of collapse

Global government bond yields have surged to their highest levels in more than a decade: this month, the benchmark 10-year Treasury rate in the United States hit 4.33%, and in the United Kingdom it was 4.75%.The reason is that central bankers are not expected to finish raising interest rates.

If the bet is correct, the consequences will be felt in every corner of the financial world.

Gian Maria Milesi-Ferretti, a senior fellow at the Brookings Institution and former associate research director of the international monetary fund, said:

"If the market thinks interest rates will stay high for longer, fundamentally the discount to future profits will be larger, so share prices will adjust accordingly. In addition, more companies may face collapse due to higher debt servicing costs."

Even without further rate hikes, the monetary policies already imposed by central banks could have a lagging effect, pushing the economy into recession or causing more bank failures.

Some 80 per cent of respondents expect a recession in the eurozone over the next year, according to the MLIV Pulse survey. But most forecasters are more optimistic, even though Germany, Europe's largest economy, has already experienced a winter recession and there is little chance of growth in the second half of the year.

For the United States, the survey results show a 50/50 chance of an economic downturn over the next 12 months. More than half of respondents said,The next Fed rate cut is likely to be driven by financial marekt rather than a weak labor market or slowing inflation.

And for how long?

In the United States, the market believes there is a greater than 50% chance that interest rates have peaked, unlike elsewhere.

The UK has the most serious inflation problem:The combination of high energy prices similar to those in continental Europe and wage increases similar to those in the United States means that the Bank of England still needs to work hard.In Japan, Kazuo Ueda, the new central bank governor, hinted that monetary policy was about to return to the mainstream, faster than expected.

After the European Central Bank raised interest rates in July, President Christine Lagarde said the region's near-term economic outlook had deteriorated.Subsequent ECB research suggests that underlying inflation may have peaked.Lagarde's speech in Jackson Hole could provide early clues as to whether policymakers are leaning towards another rate hike or a pause.

For the Fed and the ECB, the key question may be "how long to maintain" rather than "how high to increase".

Lindsey Piegza, Stifel's chief economist, said last week, "How long does the Fed need to keep interest rates at this high level? I think that was the focus of Powell's speech at Jackson Hole."

"Sustainability has become as important as the level of policy interest rates", the ECB's executive, one of its dovish members, said this month.This echoes the views of other European monetary policy heavyweights.The idea is that reducing borrowing costs to a lower level but maintaining them for a longer period of time would minimize damage to the economy and increase the likelihood of a soft landing.

Things look better?

In any case, European borrowing costs are not going down anytime soon.About 30% of MLIV survey participants said that would not happen until at least the fourth quarter of next year, while only 21% said the same about the Federal Reserve.

Of course, much of this debate is based on textbook monetary policy calculations, and it is easy to get off track.

For example,Societe Generale InvestmentMarkets are concerned that the conflict between Russia and Ukraine could still trigger turmoil in commodity markets. The unprecedented budget deficit in the US is starting to worry investors in the $25 trillion Treasury market, while Europe has just been hit by a new surge in energy prices. Milesi-Ferretti said:

"There was an upside surprise for the economy and a downside surprise for inflation. It's clearly much better than it was a few months ago, but we can't guarantee it."