ECB and Fed urged to pause interest rate hikes

The so-called Geneva Report on the World Economy highlights that disinflation is underway

US and eurozone central bankers have probably raised interest rates as far as they can without inflicting disproportionate damage on their economies, according to a quartet of leading female economists.

University of Chicago professor Veronica Guerrieri, Societe Generale chief economist Michala Marcussen, former European Central Bank official Lucrezia Reichlin, and former Bank of England policymaker Silvana Tenreyro argued for “patience” — even if that means a short-term bout of inflation.

“If we consider the extraordinary size of the supply shock the economy has had to absorb and the fact that monetary policy operates with a material lag, these observations suggest that the benefits of more tightening will be small, when compared to the risks,” they wrote in a paper. “This is particularly true for the euro area,” they said. 

Their so-called Geneva Report on the World Economy highlights that disinflation is underway, measures of long-term inflation expectations remain well anchored, and household savings accumulated during the pandemic have been eroding.

The assessment doesn’t specifically comment on the US Federal Reserve’s recent “higher-for-longer” mantra, but it does argue for a halt to policy aggression to allow prior rate hikes to take effect. 

"When we conduct monetary policy to fight inflation, we should be cautious and keep in mind that accepting a degree of short-term inflation may be a necessary cost to allow for relative price movements that help obtain a better allocation of resources,” they argued. 

“The lagged effects of monetary policy tightening are yet to make their way through the economies,” they said. 

Meanwhile, five economic institutes are predicting Germany's economy will shrink by 0.6% this year, as rising interest rates take their toll on investment and high inflation depresses consumption. In their spring forecast, the institutes had forecast gross domestic product would contract by 0.3%. 

"The most important reason for this revision is that industry and private consumption are recovering more slowly than we expected in spring," said Oliver Holtemoeller, at the Halle Institute for Economic Research. 

Bloomberg and Reuters