Central bankers set for crisis talks as inflation spirals

The world’s most powerful central bankers are jetting in for crisis talks as inflation spirals out of control.

US Federal Reserve chief Jerome Powell and Bank of England Governor Andrew Bailey are among those due to attend the three-day event in Jackson Hole in the US.

Top of the agenda will be how far to raise interest rates as they battle the soaring cost of living.

Crisis talks: US Federal Reserve chief Jerome Powell, left, and Bank of England governor Andrew Bailey, right, are set to attend three days of talks in Jackson Hole in Wyoming, USA

Officials in America, Britain and Europe are raising rates to try to douse the flames of spiralling prices. But markets are worried about how hard and how fast they will go as higher borrowing costs add to recessionary pressures across the world.

Ahead of the start of the meeting today, global markets were muted and the safe-haven dollar was again ascendant on signs of a further hawkish tilt from the Fed. 

The euro has fallen beneath parity with the dollar, while the pound has swooned to just above $1.18.

Meanwhile, the FTSE 100 fell under 7500 and Europe’s Stoxx index hit a four-week low before recovering. A keynote speech from Powell tomorrow could signal a dialling down in the pace of US rate hikes – and dampen hopes of rates being cut in 2023.

Comments this week by another Fed official, Neel Kashkari, added to the caution, warning that even more aggressive hikes might be needed. Also on Friday, America’s PCE index – the Fed’s preferred inflation measure – is released.

Last year, Powell insisted inflation would be ‘transitory’. Spiking prices were largely attributed to the return of demand after lockdowns and supply chains buckling as they sought to readjust to reopening.

But war in Ukraine has driven up energy costs and threatened blackouts in Europe. The fear is that inflation will become embedded – driving demands for higher wages from workers.

In the UK, where inflation hit 10.1 per cent last month, the Bank of England has tried to take control with a series of rate hikes.

The latest, a 0.5 percentage point rise, was the sharpest since 1995 and another looks likely in September, followed by more going into next year.

The European Central Bank has been slower to act – before ordering a surprise half percentage point jump last month.

In the US the Fed has lifted rates from near zero at the start of 2022 to more than 2pc. But the effect – to choke demand – threatens to strangle growth. 

So officials at Jackson Hole are eyeing what comes next. ‘They are caught between a coming recession and sky-high inflation,’ said Holger Schmieding, chief economist at Berenberg. ‘Their first concern is to react to high inflation. Once recession is clearly there, the concern will shift.’

US growth reversed at the start of this year but looks more likely to enjoy a ‘soft landing’ than Europe. Germany, Europe’s biggest economy, is seeing Russian gas choked off and could face a tough winter, with data suggesting it is in a downturn.

Britain is forecast to enter a recession this year. ‘The key is energy, energy, energy. Electricity prices are ten times pre-Covid levels’ said Thomas Costerg, at Pictet Wealth Management. ‘We all knew the Achilles’ heel of Europe is foreign energy and now they are paying the price.’

Richard Flynn, managing director at Charles Schwab UK, said he had seen signs of rates peaking, adding: ‘This year’s symposium may provide an early indication of when the turn from hikes to cuts may occur.’