It is common at this point in the season for dictionary editors and academics to publish their word of the year.
For the Cambridge Dictionary, the word of the year is “perseverance”, while the American publisher Merriam-Webster has opted for “vaccine”.
Likewise, Oxford Languages opted for ‘vax’ while the Macquarie Dictionary, the leading authority on Australian English, chose ‘strollout’, a popular piece of Australian slang highlighting the public’s frustration at the slowness. vaccine deployment.
For economists and financial market participants, however, the word 2021 is without a shadow of a doubt “transitory.”
This is the word adopted by central bankers around the world to describe the idea that the rebound in inflation this year is just a natural increase reflecting the bottlenecks that have built up in the chains of global supplies during the pandemic.
It has been regularly used by the US Federal Reserve, the Bank of England and the European Central Bank to explain why they did not tighten monetary policy or rush to undo the emergency stimulus measures put in place in 2020. despite the fact that in every place inflation performed well above the level one would generally expect.
This insistence that the rise in inflation is only temporary has angry investors on a regular basis This year.
Tuesday night, however, brought a sign that at least one key decision maker is starting to view inflation as more entrenched.
Jay Powell, chairman of the Fed, told the US Congress: “It is probably a good time to withdraw that word.”
The world’s most prominent central banker insisted he still expects inflation to drop next year as the supply and demand imbalances created by the pandemic and its aftermath continue to subside.
But he pointed out that rising energy costs, rising wages and rising rents could all keep inflation in early 2022 higher than expected.
He continued: “It now looks like the factors pushing inflation up will persist into the next year.”
His comments were accompanied by a signal that the Fed may now begin to unwind its asset purchases – quantitative easing in the lingo – faster than previously reported.
The Fed announced early last month that it would cut its $ 120 billion monthly asset purchases by $ 15 billion in November and December.
This would mean that QE would end in June of next year – with the end of QE being a prerequisite for the Fed to start raising US interest rates from their current near zero level.
But Mr Powell said last night: “The economy is very strong and inflationary pressures are high, so it is appropriate, in my opinion, to consider ending the reduction in our asset purchases … can -be a few months earlier. “
It was certainly a marked change of tone on the part of Mr. Powell who, just last week, was reappointed by US President Joe Biden for a second four-year term on the more accommodating Lael Brainard.
And his comments rocked the stock markets – knocking the S&P 500, Dow Jones Industrial Average and Nasdaq down 1.6% to 1.9% each. In the S & P500, the largest stock index in the United States, only eight stocks did not fall.
In the Asia-Pacific region and in Europe, the markets have rallied Wednesday, in part because, upon reflection, investors decided that a normalization of monetary policy in the United States can be seen as a sign that the US economy – and by extension the world economy – is also returning to the normal.
Yet Mr. Powell’s words have implications for his peers elsewhere in the world.
In the UK, for example, Andrew Bailey, the Governor of the Bank of England, was drop hints for a while that an interest rate hike from the current record low of 0.1% was in sight.
But it was not won in advance and, in this case, the Bank’s monetary policy committee has chosen to keep control for at least one more month while waiting to see what impact the end of the holiday regime would have on the labor market.
Since then, it has become clear that the end of the leave scheme has not led to an increase in unemployment, making an interest rate hike very likely in the months to come.
However, since the MPC has not hiked interest rates in December once in the 24 years since its inception, most economists expect it to now wait until January or even February.
The biggest dilemma, arguably, faces Christine Lagarde and her colleagues at the European Central Bank.
Ms Lagarde has made it clear that she is in no rush to raise interest rates.
She told Sueddeutsche Zeitung, one of Germany’s best-selling newspapers on Monday: “If we tightened monetary policy now, it wouldn’t add a single container ship or truck driver.
Yet inflation in the 19 euro area member states currently stands at 4.9%, the highest on record and more than double the ECB’s 2% target rate.
In Germany, the largest member of the bloc, it is even higher than 6% – a level not seen since the unification of West and East Germany in 1990 and only slightly below the current US rate of 6.2%.
Some now expect the ECB to throw in the towel.
Charles Hepworth, chief investment officer of fund manager GAM Investments, said: “It may be wishful thinking on the part of ECB President Lagarde when she says price pressures will not get out of hand – they will are already and it is difficult to follow the argument that it will soon subside. “
He said the ECB would decide in just over two weeks to end its bond purchases from next March, as previously planned, with the decision now appearing to hang over the apparent danger of the new Omicron variant of the coronavirus.
Jay Mawji, managing director of global brokerage firm IX Prime, added: “Few would dispute Christine Lagarde’s assessment that eurozone inflation will subside on its own next year.
“But the timing is the subject of heated debate and the extreme inflationary pressure we are currently under in the bloc is making finance ministers increasingly anxious.
“In the face of such scorching inflationary heat, European Central Bank Governing Council lawmakers will need to make a strong case not to curb its money printing program when they meet in December.”
Central banks in countries like Poland, Norway, Romania, Russia, Sri Lanka and New Zealand have already raised interest rates in recent months.
Yet none of the world’s major central banks – broadly defined as the Fed, ECB, Bank of England, Bank of Japan, and Swiss National Bank – have done so, and when the Bank surprised markets the last month by not moving, there was speculation, it was because it did not want to be the first major central bank to do so.
Mr. Powell has just given the MPC the cover to act.