Have central bank interest rates peaked in the US and the eurozone? If so, how quickly might they fall? From around mid-2021, central banks clearly had to tighten significantly. But what they have to do next is uncertain. Whatever central bankers might say about what they plan to do, events always have the last word. If, as many now expect, core inflation falls quickly towards their target, they will have to loosen policy. While loss of credibility is damaging when inflation gets too high, it is also so when it gets too low. A return to sub-target inflation and pushing on a string monetary policy would be highly undesirable. The time to respond to such risks looks close closer than central banks admit, especially given the lags in transmission of the past tightening.
Jay Powell, chair of the US Federal Reserve, and Christine Lagarde, president of the European Central Bank, have stated their plan not to ease soon. Intervention rates have remained stable for some time: the fed funds rate at 5.5 per cent since July and the ECB s deposit rate at 4 per cent since September. Yet Powell warned this month that the mission to return inflation to its 2 per cent target had a long way to go . Similarly, Lagarde told the FT last week that eurozone inflation would come down to its 2 per cent target if interest rates were kept at their current levels for long enough . But it is not something that [means] in the next couple of quarters we will be seeing a change. Long enough has to be long enough.
