Powell’s US Rates Warning Means Headaches for Rest of the World

Federal Reserve Chair Jerome Powell is making life tougher for his peers around the world as the prospect of higher-for-longer US interest rates reduces room for easier policy elsewhere.

Powell on Tuesday signaled the Fed will wait longer than previously anticipated to cut borrowing costs following a series of surprisingly high inflation readings — marking a notable shift from his December pivot toward easing. Treasury yields reached fresh year-to-date highs and the dollar strengthened.

global inflation

For the central bank chiefs gathering from around the world in Washington for the spring meetings of the International Monetary Fund and World Bank, Powell’s latest pivot creates a quandary. If the likes of the European Central Bank, Bank of England and Reserve Bank of Australia launch themselves into their own easing cycles, that risks driving their currencies down — raising import prices and undermining progress in getting inflation down. But not easing could risk growth.

“The risk is, the longer we see these big central banks waiting to cut rates, the bigger the risk to the underlying economy,” Lucy Baldwin, global head of research at Citigroup Inc., said on Bloomberg Television.

For some policymakers, the currency fallout is already apparent. The yen’s slide to 33-year lows may force Bank of Japan Governor Kazuo Ueda to follow up his historic departure from sub-zero settings with another hike sooner rather than later, economists warn. In China, the door might have shut for lowering rates with pressure rising anew on the yuan.