The Secret of Central Banks in Tightening Monetary Policies and the Impact on the Economy: Understanding the Role of Inflation

The secret of central banks in the tightening of monetary policies is also a required factor and the economy is more open. Inflation makes me wiggle.

Persistent inflation is always and always a monetary phenomenon in the sense that it is and should only be caused by a rapid increase in the amount of money in circulation, not in response to productivity growth. This was famously declared by the American economist and Nobel laureate Milton Friedman. Undoubtedly, this applies even today, when the economic engine of failed economies is under the strong influence of an unprecedented policy of helicopter money during the pandemic. However, it seems that central banks are not determined to take the necessary steps to permanently curb inflation, otherwise a sharp increase in rates would be extremely unpopular. If the American Fed (Federal Reserve System) and the European ECB (European Central Bank) do not communicate the end of the cycle of rate hikes, their determination to continue it is known to be weak.

years of rates are no doubt prescribed to the economy and pressure on its growth. I have a problem with the question of whether the central bank is giving enough. The reason is that the necessary conditions for sustainable 2% inflation are not yet in sight.

The necessary conditions for the normalization of inflation have not been achieved

In order to normalize inflation to 2%, a neutral growth rate of the economy, namely nominal GDP, is historically needed. Thus, it is necessary to reduce wage growth to the historical average so that it does not stimulate consumer activity too much. In order to achieve this goal, it is necessary for unemployment to increase, and this usually happens hand in hand with the correction of the company’s profit. All of these variables are correlated and mutually influence each other, so only one of them can be affected to bring about the required changes in all of them. And that’s the duty of foreign rates. While the benefits of these rates are indisputable in the system, the question arises as to whether this is sufficient.

American data also show that the current wage growth is below average high and has continued to decline, on the contrary, it has accelerated again from 4.3% to 4.5% in recent months. However, the increase in wages, which is compatible with the 2% inflation rate, is roughly 2.5%. This goes hand in hand with the fact that nominal GDP growth is now at a high rate of around 6%, if the trend is downwards. The necessary neutral growth rate is found in the interval of 35%. As for the profit of the company in the USA, there is a certain decrease, but it is still rather small (-7% year-on-year), and moreover it shows signs of recovery, so the trend in profits is in the right direction. In order to achieve the required unemployment growth of at least 2%, from the current 3.5%, it is necessary that company profits fall by approximately 20%. The dream of new entrepreneurs is showing signs of recovery after a sharp decline, and the rate of growth has recently fallen again. 3.5% unemployment in the United States is currently untouched at a record low.

Kind of wave inflation 3 scne

If the recovery in the economy continues and the rate hikes will not weaken companies and consumers, the American economy will be hit by a wave of inflation, which may not be as strong as the first one. Such a scenario is unacceptable for the American Fed, and it would likely lead to the second round of monetary tightening, which entails a significant increase in interest rates. You rate the yield on government bonds, which will make the drain on risky assets completely meaningless.

It is quite possible that the current recovery in the economy is only a temporary result of the injection of liquidity into circulation and a rough example of deprivation. According to Morgan Stanley economist Sarah Wolfe, the combination of Barbie, Taylor Swift and Beyoncé has helped to surprisingly boost the growth of the US economy this year. Consumer activity was expected to include large one-time consumer spending on “Barbenheimer,” Taylor Swift’s “The Eras” tour, and Beyoncé’s “Renaissance” tour. The current development of the economy could also be supported by the steadily growing optimism among consumers and companies and the sharp growth in the stock markets. In the second scenario, however, the necessary simultaneous economic recovery will gradually occur, including as a result of the end of the moratorium on student loans in the USA. If the central banks are aware of this, they should go at least one year out of annual rates and then keep them at the same level (according to, not historically) until the economy weakens enough.

Ultimately, this recovery will rapidly reverse course and the economy will continue on its original downward trajectory. This should happen as a result of rapidly weakening consumers, even as the profits of companies fall. In such a case, the weight will be zero except for the annual rates, which will then be maintained at the same level for a certain period of time.

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In the days of the mentioned events, there will be no annual rate hikes in the foreseeable future. Thus, in any scenario, the likely consequence of monetary policy is economic recession. Historically, unemployment growth of at least 1% has always led to 2 phenomena:

Economic recession Continued unemployment growth, at least by another percentage

many animals in the USA can also be applied to other regions of the Western Hemisphere, such as the Eurozone. These regions are highly integrated and often behave as one and the same economy. Therefore, with a certain amount of caution, these animals can also be distributed on European sites. The given development of monetary policy and the economy is in any case insensitive to risk assets. This would explain why the portfolios of institutional investors, according to the Bank of America survey, are built ultra-defensive even with apparent optimism in the markets. In a contrasting situation, for example, the country is dragged down by structural problems and is now in deflation. There, monetary and fiscal policy is oriented towards careful stimulation of the economy, which is beneficial for risky assets in the long term.

M.Sc. Timur Barotov

BHS analyst

He works as an analyst at securities trader BH Securities as, where he is responsible for forecasting and analysis of capital markets with a fixed exchange for American markets. He graduated with a master’s degree in finance from the Institute of Economic Studies of Charles University and has been investing in it since the beginning of his studies. His professional experience includes consultancy in the field of acquisitions and acquisitions, and analyst projects involving valuing companies.

BH Securities a.s.

BH Securities is a licensed securities trader and only the Prague Stock Exchange. The company was founded in 1993, shortly after the creation of the capital market in the Czech Republic.

Today, BHS is one of the most important non-bank securities dealers on the Czech capital market, and the individualized investment service has been providing it continuously for 30 years without changing the name or approach.

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2023-09-03 07:31:17
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