The minutes of the last monetary meetings of the two main central banks were published last week and brought some color to the discussions between the members of the two institutions in the ongoing monetary tightening.
On the Fed side, all is said and even members considered dovish are now spearheading an accelerated tightening. This is for example the case of Lael Brainard, future number two at the Fed, who came to destabilize the markets by giving a particularly offensive speech on the essential need to slow down inflation by hiking 50 bps if necessary. It also declared itself in favor of reducing the balance sheet "at a considerably faster pace than during the previous takeover, with significantly higher amounts and over a much shorter period compared to the 2017-2019 period". The tone was therefore set and the minutes confirmed this trend. Without the war in Ukraine, the Fed would probably have raised rates by 50 bps instead of 25 bps at the last meeting, with most members increasingly worried about the risk of a slippage in the "price-wage loop". with moreover a rise in prices in sectors hitherto little affected such as education or health care. In addition, these minutes have for the first time detailed the intentions of the American institution on the reduction in the size of its balance sheet. The latter is thus aiming to reduce the size of the balance sheet by 95 billion dollars (60 billion in Treasuries and 35 billion in MBS) at cruising speed after a 3-month ramp-up which should begin in May. The reduction in the size of the balance sheet should weigh on the rise in long rates, which will allow the Fed to adjust Fed funds by limiting the risk of a further inversion of the yield curve. The message is therefore clear and the tightening will be very rapid. Moreover, James Bullard, a particularly hawkish member, once again warned of the risk of inflationary slippage with a central bank that remains “behind the curve”. According to the forecast of the St. Louis Fed, key rates should already be at 3.5%.
On the side of the ECB, the message is a little more blurred. If the path of tightening is acquired, differences remain between the members. While some believe that accelerated monetary tightening would have little or no impact on inflation, essentially driven by energy prices, the most hawkish members believe on the contrary that the inflationary forecasts of the ECB are far too optimistic (return to 2% from 2023) and are therefore less patient in the face of the uncertainty generated by the Ukrainian crisis.
Finally on another subject, note that in China, Caixin activity indicators fell sharply in March, with services even reaching a 2-year low point, impacted by the resurgence of the epidemic and the strict government containment strategy. This is particularly the case in Shanghai, which has been completely shut down for more than 10 days, and where, a rarity in China, signs of protest are emerging for the first time.
