The Last Global Neoliberal Institutional Pillar Could Soon Crumble

By Michael Every of Rabobank

We’re All In A Hole Alright

The Fed minutes overnight showed the FOMC largely united behind rates on hold in July as they “assessed that the effects of higher tariffs had become more apparent in the prices of some goods but that their overall effects on economic activity and inflation remained to be seen.” Indeed, the key point was that they “judged that considerable uncertainty remained about the timing, magnitude, and persistence of the effects of this year’s increase in tariffs.”

Does anybody anywhere know how the current confluence of inflationary and deflationary forces will play out? In the UK, for example, where the BoE are already cutting rates, headline inflation is 3.8% y-o-y, nearly double target. There are real signs of economic weakness, but also real inflation in pocket and lingering on in services.

One would hope the top central bankers about to assemble at Jackson Hole are laser-focused on this. The Financial Times editorial today argues their collective focus should be on staying independent, getting better economic data, and understanding how government spending drives inflation better. There are problems with each – and more to boot.

Bloomberg says Jackson Hole will rally around under-fire Fed Chair Powell, which seems logical. Yet Powell is still likely to see his replacement named within weeks, it appears; moreover, David Zervos — one of the potential candidates to succeed him — just said it’s inaccurate to describe the Fed as independent, and claimed Powell is aligned with the political left. And will Jackson Hole also rally round Fed Governor Cook, who just had a criminal referral letter for mortgage fraud sent to the DOJ by the head of the FHFA? Trump has called on her to resign: she says she won’t be bullied. We have of course seen similar Fed governor turnover in recent years.

While each central bank is different in terms of its constitutional set-up, how many of them are truly safe in their (very recent in historical terms) independence when push comes to shove? Who appoints whom? That’s a one-way street. As tellingly, what can central banks do to ensure their independence if it’s threatened? ”Raise rates?”(!) Yes, some central banks have done so in the past to hurt governments they didn’t like: no, they won’t do that now. But it might delay rate cuts, perhaps. Or might they not buy their own government’s bonds in a market panic ensuing from fears over their loss of independence? There’s a discussion point with strong views either side, depending on which country we are talking about.

In short, on one level we are talking personalities here; on another we are talking underlying political-economy ideologies; and on another we are talking realpolitik and power structures.

Meanwhile, what’s true for central banking is even more starkly evident in the world they are now operating in.

Stunning Europe, but not a surprise to those who think in the terms described above, Russia now says it must be included in any Ukraine security guarantees – along with China. Russia also says no talks with Zelenskyy are on the horizon.

The unwillingness to talk to Ukraine is no surprise for Europe; but the Russian insistence that it gets to determine what Ukraine’s security guarantees look like — and that it wants China involved, perhaps even meaning the PLA operating on the ground(?) — is a geopolitical and diplomatic shock of the highest order for Brussels.

(And that comes on top of reports that European Commission President von der Leyen was reportedly asked to leave the room at times during Monday’s White House discussions on Ukraine because she wasn’t “a leader” nor “an elected head of state.”)

As Politico puts it bluntly, ‘Russia wants… Russia to have veto over Western security guarantees for Ukraine’ while ‘Europe has no real solutions for security guarantees on Ukraine’. The stakes here are sky high and so are the market’s fat tail risks.

Is Putin risking the massive increase in US and EU primary and secondary sanctions that could disrupt global trade and markets? Or will the US accept his terms, seeing Ukraine and Europe humbled even further? On one hand, that’s a ‘Keep Calm and Carry On’ markets environment alongside the total defenestration of European strategic autonomy, with real long-run implications for its economy. On the other, it’s a likely rapid surge in energy prices and a massive supply chain shock as long-threatened global bifurcation accelerates rapidly.

On which note, Indian state firms reportedly secured several shipments of Russian crude recently, ignoring US warnings of higher tariffs, while Russia says it plans to start sending LNG to India, an area the US had been targeting. Moscow also called for “greater Eurasian partnership” between itself, China (which is rejecting Nvidia H20 after recent “insulting” comments from Commerce Secretary Lutnick, and which may launch CNY stablecoins ahead), and India. That all raises the stakes from the current stand-off over Ukraine even higher. And that’s as a serious US Navy flotilla heads for oil-rich Venezuela, run by “narco-terrorist” President Maduro, who has a $50m US reward on his head: hello, Monroe Doctrine.

(Moreover, purely for the ECB to consider, ‘US drug pricing shake-up threatens access to medicines in Europe’ (Politico). Does that sound inflationary or deflationary?)

So, are the Jackson Hole central bankers worried about their futures; a lack of accurate data; and their own poor understanding of how governments drive inflation as defence spending is about to return to Cold War levels also following these developments? They are supposed to be ‘forward looking’, right? What’s their base-case scenario then? Does their modelling capture these risks? Will they make that clear, or are we supposed to imply it from what they share? Of course, I’m being facetious.

The reality is central banks will just wait and see what happens to energy prices and supply chains, then react. That puts their much-vaunted ‘independence’ into perspective: it’s more of a reaction function outside of the kind of ‘Econ 101’ world we no longer live in. Regrettably, few in the private sector have that luxury, and many must position/hedge such risks in advance.

If we were to see change at the Fed that drives a wedge between it and other central banks — with the PBOC already far from independent in the Western sense — the last global neoliberal institutional pillar could crumble, as I warned in Thin Ice in 2016. If it goes, so could a lot else.

Already, what’s good for one central bank isn’t necessarily good for another. The RBNZ governor just told the Kiwi parliament (where the government has tweaked the Reserve Bank’s remit in the recent past: there is political plasticity even in the home of inflation-targeting) that higher commodity prices and lower rates are the ingredient for an economic recovery in H2. Not elsewhere though, surely? They mostly don’t want the higher commodity prices part.

There’s certainly a lot for the world’s top central bankers to consider over the next few days, and vastly more than the FT would have it – because we’re all in a hole alright.