MNI: Austria Open To Discuss 'Interesting' Spain EU Asset Plan

Austria will consider “positively” a new Spanish proposal to transfer part of the European Union’s stock of national debt into joint bonds to create a safe asset, a Finance Ministry spokesman told MNI on Monday.

Spain last week submitted a proposal for a European Sovereign Facility which would initially cover more than a third of states’ annual redemptions as well as fiscal deficits, and hopes to build a "coalition of the willing" to push it through. (See MNI: EU Safe Asset Plan Sees Positive Feedback-Spain Says)

”It's an interesting proposal that we'd like to discuss,” an Austrian Finance Ministry spokesman said. “There are still some open questions, but in principle, we view the idea of ​​discussing joint debt to finance public goods positively. In this context, the role of the euro should be strengthened.” 

Austria is considered one of the bloc’s more fiscally hawkish member states and typically opposed to pooling debt, though its position has evolved under Finance Minister Markus Marterbauer.

In September last year he said “much discussion” was needed before EU joint debt becomes a reality, but that “step by step we are going in this direction. As an economist, I think this is the right direction.”

“We do not comment on statements made by other EU member states,” a spokesperson for the German Finance Ministry said when contacted by MNI.

MNI INTERVIEW: AI Raises Rates Before Boosting Growth - Rachel

The boost to growth from AI is likely still to come while the impact of the technology in pushing up the neutral level of interest rates may already have been felt, the co-author of the influential “secular stagnation” paper told MNI.

"We have to consider the possibility that the current high level of longer-term interest rates already reflects the expectation of an AI boom," UCL Assistant Professor Lukasz Rachel, a former Bank of England economist who wrote the famous paper on the decline of the neutral interest rate with Larry Summers in 2019, said in an interview.

Rachel disagreed with those who have argued that AI will raise potential growth more than interest rates, though the lagged effect of its impact in boosting productivity should mean that its fiscal impact from now on should nonetheless tend to be positive, he said. (See MNI INTERVIEW: AI Should Boost Growth More Than Rates)

If this is the case, then "the bad stuff — from the fiscal perspective — has already happened," he said, noting that interest rates have already "increased a lot” since the secular stagnation paper.

In one scenario, if AI increases productivity growth by 0.75 percentage points and company mark-ups go up a couple of percentage points then the neutral level of rates will rise by just under a percentage point, he said at a recent conference at the BOE.

"I think you'd be hard pressed to find anything that goes the other way, which would say that [the neutral rate] moves less than [growth]," he said in the interview.

Still, "if there is one thing that can represent an upside risk for fiscal sustainability, it is that productivity upside risk from AI." (See MNI INTERVIEW: AI Boom Doesn't Justify Lower Rates - Haskel)

Given that neutral rates do seem to have risen in recent years, it would be logical for any impact from AI due to investor expectations to have been felt before its growth effect kicks in, Rachel said.

"If you interpret that as AI driven, which I think there's some legs to it because look what's happening in the stock market, for example ... maybe there's not that much more that that is going to happen in the bond market," he said.

DISINFLATION

Econometric models provide different estimates of the disinflationary impact of AI, depending partly on whether consumers perceive it as a boon or a threat, and adjust their savings accordingly, Rachel said.

"There's going to be a big boost to supply, and so for a given dynamics of wages, there's going to be a big reduction in costs, and therefore that could act as a disinflationary force," he said. "To the extent that the productivity growth is higher and people perceive that technological change, they also adjust demand ... we need to save less today."

Alternatively, however: "If AI leads to a ton of uncertainty at the worker level, and that uncertainty is so overwhelming the positive productivity effect ... goes towards higher saving and less consumption ... if you take that story to the extreme, you could generate a disinflationary impact through precautionary saving."

GLOBAL EFFECTS

AI’s effect on rates should be fairly similar across economies, though different approaches to the technology by governments could lead to different outcomes, Rachel said.

"In terms of the impact of the use of the technology and the potential productivity gains, I think it's a pretty global story," he said, adding that "you could tell a story where it's more backward economies that are going to ... have some easier time catching up."

MNI INTERVIEW: Fed Prepares To Hike On Sticky Inflation-Mester

The division of opinions within the FOMC on the direction of U.S. monetary policy reflects uncertainty rather than complacency and will only be resolved as new data accumulate, former Federal Reserve Bank of Cleveland president Loretta Mester told MNI. 

Roughly half the committee has penciled in rate increases this year while the other half favors holding. If underlying inflation fails to decline as the Fed's own forecasts project, policymakers will have little choice but to raise rates, she said. 

"They do have an inflation problem," with services ex-housing stubbornly high even before the Middle East oil shock, Mester said in an interview. "You can make a case for holding pat until we gain some more information, but if you continue to get reports that do not show the underlying inflation rate coming down, then you're going to have to tighten." 

Mester cautioned against finding too much comfort in stable medium- and longer-run inflation expectations, saying they remain anchored only because markets expect the Fed to deliver on price stability. Should expectations begin to drift higher, the committee would find the inflation fight considerably harder to win, she said. (See MNI INTERVIEW: Fed Could Soon Lean Toward Rate Hikes-Giannoni)

CASE FOR WAITING

Standing pat also carries its own risk, because it would amount to an implicit loosening of policy as real rates fall, she said. The committee waited too long to respond to rising prices after Covid, and growing supply-and-demand imbalances ultimately required more aggressive tightening than would otherwise have been necessary.

"Kevin [Warsh] has said we're going to get back to 2% inflation. Well, they need to tell us how they're planning to do that. Is it just waiting, because somehow you think the combination of oil prices coming down coupled with AI lowering prices eventually through productivity will help? We don't know what they're thinking of." 

The labor market is also complicating the committee's calculus, Mester said. Some officials view a low unemployment rate as evidence of resilience, while others attribute it partly to falling labor-force participation, an argument that could support a longer pause.

"If you wanted to say the labor market's probably not as strong as the unemployment rate suggests, and therefore that's another reason to wait, I think you could make that argument." (See MNI INTERVIEW: Fed Could Be Easing Before Year-End-Kroszner)

TASK FORCES 

Mester said she was encouraged by the caliber of leaders selected for Fed Chairman Kevin Warsh's new task forces to reexamine the conduct of monetary policy -- a group comprised of scholars, central bankers and business leaders with a diversity of views.

With regards to the balance sheet task force, co-led by Karen Dynan, Raghuram Rajan and Jeremy Stein, Mester said she expects the group to dissect the trade-offs of the current ample reserves system and perhaps to create a clear set of principles on how to distinguish asset purchases to support market functioning from those intended to add accommodation -- a distinction the Fed itself failed to make during the pandemic, she said. 

"All central bankers, having gone through the financial crisis and the pandemic, have been rethinking the costs and benefits of QE," she said.

Rajan is likely to focus on the risk that an oversized Fed balance sheet crowds out private-sector risk management, a view that aligns with Warsh's own thinking, while Stein has historically favored maintaining ample liquidity, she said.

On the communications task force, which includes former Bank of England governor Mervyn King, Mester said she expects recommendations to center on how the Fed conveys its reaction function conditional on the economic outlook and better mechanisms for signaling the diversity of views among committee members, potentially including changes to the dot plot. 

She doubted that declining to discuss the rate outlook as Warsh did in his June press conference was sustainable. 

"First, the Fed owes us some information and transparency about how they're thinking about the economy," she said. "Secondly, if we don't hear from the chair, then he's allowing others to drive the conversation. I don't think that's probably a very good way of leading." 

MNI BOC WATCH: Competing Growth, CPI Risk Keep Macklem Holding

Canada's central bank is seen keeping its policy interest rate at 2.25% Wednesday on a continuing mix of economic slack and inflation expectations that have held firm through the Iran conflict. 

All 27 economists surveyed by MNI see Governor Tiff Macklem holding the rate where it's been since October, which he views as the low end of the neutral range. Macklem at the June 10 decision signaled he could hike multiple times if high energy prices turn into broader inflation or cut if there are big new U.S. tariffs.

Macklem could well repeat his musing to reporters last time that little had changed among the balance of risks. Donald Trump on July 1 declined to renew the USMCA trade deal to set up another year of tariff negotiations and the frayed Iran ceasefire has left oil prices elevated but below records set after the conflict began in February.

Wednesday's decision comes with a new quarterly economic forecast and perhaps minor changes to the April view for 2026 GDP growth of 1.2% this yea and inflation of 2.3%. That combination creates what officials call a dilemma where any hike or cut brings risks of either letting inflation climb further or weakening an economy that stalled in the first quarter. 

READY TO BE NIMBLE

Macklem will benefit from continuing to tilt his remarks towards multiple hikes versus a cut to keep inflation expectations in check and avoid a repeat of the burst of prices after Covid lockups, former officials have told MNI. (See: MNI INTERVIEW: Pre-Emptive BOC Talk Beats Moves-Ex Deputy Lane)

Economists predict the Bank will hike twice in the first half of next year while investors see some chance of an increase late this year. Even with heavy tariffs on steel, aluminum and autos Canada's energy firms benefit from higher prices, while consumer and increased military spending are also seen adding to a rebound. (See: MNI INTERVIEW: Trade Delays BOC Hike Until Late 2027-Stillo)

As for the Bank's mandate of keeping inflation at 2%, core indexes have faded to about that mark in recent months while headline prices quickened to 3.2% in May from a year ago. Officials see CPI holding around 3% in coming months before easing back to target. 

Asked last time if the growth or inflation risk is bigger, Macklem quipped "both" and added what policy comes next “is less about the timeline, and more about the conditions.” The Bank's June decision said so far there's little evidence of pass-through but officials won't allow inflation to become widespread or entrenched and policy may need to be "nimble." 

MNI INTERVIEW: Fed Could Be Easing Before Year-End-Kroszner

Federal Reserve Chair Kevin Warsh could lead the FOMC to lower interest rates before the end of the year if energy-related inflation subsides fairly quickly and inflation expectations remain contained, former Fed board governor Randall Kroszner told MNI. 

“If inflation expectations stay very well anchored, and he can convince other people around the table on the timing and extent of the AI impact, I think they'll either be on hold or they will have a cut as the next action,”  said Kroszner, a professor at the University of Chicago Booth School of Business, in an interview. 

“Will it be in the next three months? No. Will it be potentially in the last part of the year or the beginning of next year? That's what I would say.”

Kroszner is quite sanguine on the inflation outlook, believing worries that U.S. tariffs would lead to global trade wars were overstated given U.S. leverage over energy markets. He is also heartened by the rapid decline in oil prices at the first hint of a resolution to the Iran war, and thinks the dampening effects from lower shelter costs on the inflation rate will continue. 

“I see the impact of the war in Iran as being something that could be interpreted more as a one-off. What we’ve seen is the incredible flexibility in energy prices. They did move up rapidly but when there was a ceasefire signed they fell to where they went pre-war,” he said.  

“So I don’t anticipate that there’ll be much pressure in the monthly inflation numbers starting in a few months and you will also have Kevin I think gradually convincing people that the AI productivity impact is not only real but substantial.” (See MNI INTERVIEW: Fed Will Be On Hold As Oil Shock Unwinds-Levy)

TASK FORCES

Kroszner is encouraged by the announcement of prominent economists and macro thinkers to Warsh’s five task forces, and by his already visible stamp on the Fed’s communications approach.

“These are all excellent well-known people who are very much independent thinkers and are not being drawn from one particular school of thought or point of view. This illustrates that Kevin is not trying to push one agenda but really trying to draw on the best thinking,” he said.

Kroszner said that revisiting key measures of inflation and which ones the Fed emphasizes is a legitimate exercise given large structural changes in the economy, and could lead to a renewed emphasis on trimmed-mean measures.  

COMMUNICATIONS BALANCE 

Warsh will have to strike the right balance between pulling back on forward guidance while still ensuring enough Fed communication to allow the market to properly price in the central bank’s reaction function. 

“Many economists think that having some form of guidance and having clarity in the reaction function helps to reduce volatility and potentially helps the markets do the work for the Fed or make it easier for the Fed to get to its goals because the market will know where it’s going and sort of move in that direction,” said Kroszner. 

“That said, the optimal amount of communication is not talking about every data point that comes out and having 15-20 people do that. Kevin really does feel that the Fed got itself into some hot water by making commitments that it couldn’t keep,” he added.

“A lack of clarity in communication about what the Fed was doing for monetary policy purposes versus crisis management, market function purposes was one of the things that got the Fed to buy far more assets than they otherwise would have purchased following Covid. And that dramatic growth of the balance sheet was a contributing factor to the high inflation that we had.”

MNI INTERVIEW: BOE Needs MPC Central Forecast In July - Aikman

The Bank of England should publish a central forecast reflecting the views of the Monetary Policy Committee regardless of uncertainty caused by the Iran war, National Institute of Economic and Social Research director David Aikman told MNI.

April’s Monetary Policy Report was only the second in which the BOE did not commit to a central forecast, instead delivering three scenarios conditioned on different paths for energy prices and second-round effects. In its July MPR, Aikman said the BOE would be better off going back to a market-rate-based central projection despite oil price volatility.

"Even though it's flawed, I think the ... current approach of conditioning on the market curve and using that as a signal as to whether the Bank thinks the market curve is kind of roughly right or a little bit too rich in some areas, is quite a good approach," Aikman, a former senior BOE official, said in an interview.

His call echoed comments by Chief Economist Huw Pill, who has said the shift away from central scenarios makes it harder for the Committee to reach a collective view. Aikman noted that a recent speech by another MPC member, Alan Taylor, also stressed that the last time the BOE omitted a central scenario, in May 2020 when the economy was effectively shuttered by Covid, it produced a single “illustrative scenario” instead. (See MNI: BOE Needs More Varied Scenarios - Bean, McMahon)

There is "an implicit desire in [Taylor's] speech to return to a central forecast, which I fully agree is what the MPC should be trying to do," Aikman said, adding that "you need to have a forecast that people can buy into."

Governor Andrew Bailey has previously talked about the Bank moving to a staff-led forecast but Aikman believes this would, on balance, be a mistake. 

"Is the forecast an input into the policy process, in which case a staff forecast might work, or is it an output? ... Is it the MPC communicating its view on the outlook through the lens of the forecast? Now, traditionally, it's been both," Aikman said.

The committee should avoid a dynamic where they publish a staff forecast they disagree with, he added, as this would be "potentially misleading."

MARKET RATE PATH DISTORTIONS

While the MPC has traditionally conditioned its central forecast on a market rates curve, this has recently deviated significantly from  analysts' expectations, with the former implying markedly more tightening. While Taylor said the Bank's market rates-based forecast "inherits those distortions," Aikman is wary of replacing it. (See MNI INTERVIEW: UK Inflation Expectations More Loosely Anchored)

"Even if there is a set of risk premia in the OIS curve, you can't just ignore them. That is actually something that's affecting what it costs you to get a mortgage ... those risk premia need to be taken into account in the forecast," he said.

Ditching the OIS swap curve would raise additional complications, Aikman added.

"The forecast isn't just conditional on the market curve for interest rates. It's conditional on exchange rates, on equity prices, on every other bit of financial condition you can imagine [and] all of those other prices in the economy are effectively consistent with the market curve,” he said. (See MNI: Calls For BOE To Be Clearer On Financial Conditions)

"As soon as you step away from conditioning on the market curve, you have to work out what you're going to do with all of those other asset prices, because if you told me, 'well, interest rates are actually going to fall over the next three years rather than increase as the market curve has got,' then presumably you'd have a lower value of sterling and you'd have a bigger stock price. So you'd have to endogenously work out a different set of paths, which is not a simple thing to do.”

MNI INTERVIEW: Fed Could Soon Lean Toward Rate Hikes-Giannoni

Federal Reserve officials are increasingly worried about high inflation and could start thinking about hiking rates soon if price pressures do not ebb, former Dallas Fed research director Marc Giannoni told MNI. 

“If inflation does not come down as we would expect and as the FOMC is expecting, then they will need to make some adjustments, then I would imagine they hike,” said Giannoni, now chief U.S. economist at Barclays, in an interview. 

He still thinks the most likely outcome is for the Fed to remain on hold until the end of 2027, but sees a “narrow path” to avoiding rate increases given the elevated inflation figures. (See MNI INTERVIEW: Fed Right To Hold Off On Hikes For Now - Keen) 

HAWKISH DISSENTS

Indeed, he noted the possibility of hawkish dissents as early as the July meeting, given sentiments expressed in minutes to the June decision.

“It’s quite possible. We had participants saying they would have favored a hike as early as June. They could get along with a hold, but if they were left to their own devices they would have preferred to hike. Those individuals will almost surely want to hike again in July,” he said.

The only thing FOMC members need to nudge them away from a wait-and-see stance and into hiking mode, Giannoni said, is for inflation to appear to be settling well above target rather than following the gradual decline officials expect after an energy-related bump. “If that does not happen, we are pretty close to having them switch to hikes earlier." 

While inflation pressures have been exacerbated by tariffs and the Iran war, Giannoni said the outlook for prices was not favorable even before the start of the conflict. 

The most important inflation surprise of the year has been the boost to prices from an ongoing boom in AI investments, which might eventually become disinflationary but right now is working in the opposite direction, he said. 

“The biggest risk and the biggest factor to us that affects PCE prices is this inflation in categories like software and computer accessories, which is related to the AI investment boom, the huge demand for chips and memory and things of that sort,” he said. 

COMMUNICATIONS VACUUM

Giannoni, also a former New York Fed staffer, said he welcomed some of Chair Kevin Warsh’s changes to communications, but hopes he does not take central bank circumspection a step too far, leaving financial markets to guess how the Fed will react to incoming data. 

A much shorter policy statement, for instance, is a welcome change, he said. Warsh’s critiques of shortcomings in the Summary of Economic Projections are also justified. 

“I think the dot plot has long been recognized as having flaws, in particular because it presents a simple projection by each individual under a certain scenario that can be completely different across individuals,” he said. 

That doesn’t mean it should be jettisoned, but rather replaced with something that offers more clarity and information rather than less, he added. “Moving away from that without having a good replacement, I think would be very problematic.”

At the same time, Giannoni would like the new chair to offer more detail both on how he is thinking about the current state of the economy as well as some hints of the Fed’s reaction function under his tenure. 

“This idea that somehow financial markets are going to derive pure signals about the economy and its future when they don’t get that communication at the central bank – it’s a risky operation,” he said. “Market participants have no choice but to form expectations about what the Fed is going to do. If the Fed doesn’t say anything, then you go by what you have, and you may misinterpret what they say.”