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MNI INTERVIEW: AI Tops Risks To US Outlook - Hyundai Exec
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Germany should revise a 2025 constitutional amendment loosening its “debt brake” on borrowing, a member of the German Council of Economic Experts told MNI, adding that national finances will get “dramatically worse” in coming years without reduced spending and higher taxes.
“The message was a very strong one,” Martin Werding said in an interview following the release on Wednesday of the GCEE’s Annual Report. “Looking ahead a few years we can see that things are going to get dramatically worse.
Chancellor Friedrich Merz, Finance Minister Lars Klingbeil and other senior ministers seem to understand the need to cut spending and boost productivity, but whether they can do so remains to be seen, Werding said.
Things will “really get worse after” 2030, he said, though Germany’s unpopular CDU-SPD coalition government “really has nothing to lose” from taking action before elections in 2029, Werding said.
“This government has opened Pandora’s box by changing our constitution and making feasible the debt financing of infrastructure on the one hand and the military on the other,” he said.
“Currently we have 2.5% of GDP financed outside the core budget, meaning that even if it were reduced at the rate of 0.25% per year it would require 10 years to be reduced to zero. In order to really make sure to make things watertight, you'd need to adjust the constitution once again, which calls for a two-thirds majority in the Bundestag.” (See MNI INTERVIEW: Germany Heads For Debt Downgrade-Watchdog Chief)
SLIM MAJORITY
A key difficulty is the government’s slim parliamentary majority, though attempts to prevent the far-right Alternative for Germany party taking power may result in an even more fractured coalition in 2029, Werding said, calling for action now.
Germany’s debt-to-GDP ratio - currently 63% - may be low compared with G7 countries, but not in relation to other EU members, Werding said, and is set to rise to 98% by 2040.
“It’s not just that we can draw a path to 100% by 2040, it’s that it does not stop there. As a Council we discussed whether the debt path might converge to some higher level, but this is certainly not guaranteed. And then there are uncertainties regarding interest rates.”
Werding was on the independent commission which recommended pension reforms that fell short of the of the GCEE’s earlier suggestions, despite constituting “huge steps” in the right direction. (See MNI INTERVIEW: German Pensions Model For EU Reform - Rocholl)
Whether they will be adopted in full is, however, doubtful.
“It is a genuine test of how, in a broader sense, the government is able to show their capacity to translate proposals into reality,” Werding said.
Measures including removing “ineffective, economically-dubious subsidies, often with negative distributive effects,” could save up to 2.2% of GDP, he said, though GCEE members could only agree on action equivalent to 1.4% of GDP - less than a third of the 4.6% needed.
Members were divided over how to raise revenue, with most stating that increases in sales and income taxes are “unavoidable” in the medium-term, though all agreed boosting productivity is vital.
HOSTILITY TO TAX RISES
“We’ve received a lot of criticism for stating that in the medium term an increase in sales and income taxes is unavoidable,” Werding said, with the centre-left hostile to raising VAT alone, and the centre-right against hiking income tax for higher earners, leaving tax policy “immobile in many places where one could do reasonable things.”
Reducing bureaucracy and regulation - alternatives to hiking taxes proposed by the GCEE’s Veronika Grimm in a dissenting opinion - remain important, Werding said, but are slow acting, and will not generate anything close to the growth needed to offset budget shortfalls and demographic change in coming years. (See MNI INTERVIEW: German GDP Underestimated - Ifo's Peichl)
“In order to close the financing gap by higher growth rates alone we'd need 8% growth on real terms for 10 years in a row, and that is simply nonsense given that our current rate of growth based on production potential is 0.5%, and that will decrease over the coming years as older people leave the labour force.”
Nov-13 13:29
The Bank of England's Monetary Policy Committee needs to explain the disparity between its signalling for only limited further tightening and its much more hawkish in-house rate projections, National Institute of Economic and Social Research chief economist James Smith told MNI, adding that wage growth may exceed the Bank's expectations.
The MPC hiked Bank Rate to 4.0% at its November meeting, and has signalled that one further hike is likely. In contrast, its Monetary Policy Report’s central scenario saw the rate rising to 4.8% by Q1 2027 and peaking at 5.2%, while its adverse scenario, assuming elevated energy prices and second-round effects, has the rate peak at 6.0%.
"When you're doing this optimal path, what's really striking is you get quite aggressive increases in interest rates. They're more aggressive than suggested by the market path [which peaks at 4.9%]," Smith said in an interview. "It puts the onus on Monetary Policy Committee members to tell us how those extra paths are influencing their decision.”
If members are worried about "a period of high wage growth that gets embedded in future price rises, then ... there's a risk management argument for being more aggressive in the near term," Smith said. "But it also really increases the number of questions that you need to answer about ... [how] big the risks are and your attitude to the risks, how they feed into your decision today."
DEC OR FEB HIKE
Comments by Deputy Governor Clare Lombardelli that the Bank should "proceed gradually" with hikes, while adding that this does not preclude "back-to-back" hikes, have left the market unsure whether it will next act in December or in February.
Smith said that while it would make sense for the MPC to wait until the publication of its next Monetary Policy Report in February before its next rates increase, the economic resilience implied by Thursday's strong GDP numbers suggests a second consecutive move could be warranted.
"If we get upside surprises on inflation and the labour market next week then that creates the extra pressure for a rate rise in December and moving more quickly," he added.
STICKIER INFLATION
NIESR believes that inflation is likely to be more persistent, fed by higher-than-assumed wage growth on the back of higher energy prices.
"In the context of what's happened in recent years, there is likely to be more persistent inflation than the Bank seems to be assuming, and that's a view about inflation expectations," he said.
"The actual wage data last month were a little bit worrying. We have this very high proportion of employees that are receiving wage increases at 4% or more, and we also have some measures of the labour market that are ... [around] long run averages, so the labour market doesn't look that loose in that context," he said.
"I think we're a little bit more worried about how much inflation could be generated by the labour market."
The rates models included in the MPR will only be a baseline for the MPC, as they include simplified assumptions about the labour market, which obscure sector-by-sector variation in skill shortages and the likely shifting response of wages to inflation.
"If you were ever going to be concerned that you could get stickier and higher and more persistent inflation in the future, it's when you've just had a period of high inflation and ... you've got workers and firms who have seen the effects of that," Smith said.
He said the Office for Budget Responsibility, the official fiscal forecaster, may be underestimating wage growth. Its projections alongside the October Budget used market data taken before the recent rise in energy prices and forecast earnings growth of just 3%.
"Their peak in inflation now looks too low, and their wage growth, partly as a result of that, looks too low. I should say that there's a long-standing issue here where the OBR have had relatively low forecasts for wage growth," he said. (See MNI INTERVIEW: UK Wage Growth To Slow - OBR's Miles)
Nov-13 12:19
The biggest wild card for the U.S. economy is whether the AI boom turns to bust, sharply slowing growth and making it much easier for the Federal Reserve to pivot back to rate cuts, Yongseok Shin, executive vice president and head of business intelligence at Hyundai Motor Group, told MNI.
"That's the number one thing we are watching, and it's completely beyond our control," said Shin, economist on leave from Washington University in St. Louis and a former research fellow at the Federal Reserve Bank of St. Louis.
Shin argues that AI valuations are due for a reality check, because the speed of adoption hasn't immediately caused productivity to surge and leading AI labs have mistaken subsidized adoption for boundless demand.
By initially offering computing tokens at steep discounts, developers convinced themselves that enterprise appetite was infinite. Now, as corporate bills mount, companies are pushing back and sending routine tasks to cheaper, open-weight models rather than expensive frontier systems.
"If it's zero price, of course demand looks infinite, but that doesn't mean the price elasticity is zero," Shin said. "The AI labs may find that demand is actually very price-elastic, and their revenue projections may be a little too optimistic."
But Shin pushed back against fears that an AI correction would trigger a systemic meltdown akin to the 2008 financial crisis. Unlike 2008, AI financing is heavily concentrated in private credit and insurance companies -- institutions that aren't vulnerable to traditional bank runs. Industry giants like Nvidia are also generating substantial real cash flow, he noted.
A downturn would be "more orderly, with less panic," Shin said, largely hitting wealthy investors.
HAWKISH FED
In the meantime, Shin expects the Fed to maintain a hawkish bias as policymakers confront sticky inflation and supply-driven energy bottlenecks tied to the Middle East conflict. The central bank will likely deliver two more quarter-point rate hikes -- probably in December and again early next year -- before pausing to assess the economy, he said.
Stronger-than-expected October job growth and a hot CPI report hand the FOMC an excuse to err on the side of a slightly more restrictive posture, yet hints of labor market weakness and broader uncertainty will prevent them from doing more, Shin said.
Real wages have fallen over the last couple of months, an indication that inflation is predominantly driven by supply shocks, he said. Lower wage earners are worse off -- the long-term unemployed pool has risen and new entrants are waiting longer to get jobs. The broader U-6 measure of unemployment also edged higher last month, he said.
"If the AI investment boom implodes, who knows? At that point, it would be much easier to cut rates." (See MNI POLICY: Fed To Reassess Policy After 1 Or 2 More Hikes)
TARIFFS
Tariff-driven inflation may not be entirely past either, as foreign exporters which have absorbed the duties to protect market share still plan to recoup those costs, Shin said. Automakers importing vehicles from Japan and South Korea have generally paid the 15% tariff so far without raising prices, a position that is unsustainable given the heavy investment needed to keep pace with fast-changing technology.
But rather than hit consumers with an abrupt increase, companies plan to pass the costs along gradually.
"There will be efforts to raise prices in a very imperceptible way. So in that sense, I don't think it's really over yet. It's not like a 15% jump all at once to a new level; it works very slowly over time."
Nov-13 10:12
The Bank of Japan is considering clarifying its forward guidance as early as the Dec 17-18 meeting to give itself greater flexibility over the timing of future rate hikes and discourage markets from pricing in increases at three-month intervals, MNI understands.
The change could follow a widely expected 25-basis-point hike to 1.5% in December, although the BOJ may wait until January when it updates its medium-term economic and inflation forecasts.
Leaving the guidance unchanged risks reinforcing market expectations of further hikes in March and June or July, effectively locking the BOJ into a quarterly tightening path and restricting its policy flexibility. The BOJ does not consider such a predictable rate path appropriate, particularly as it approaches what officials may regard as a reasonable level for the policy rate. (See MNI POLICY: BOJ Unsure That Three More Hikes Needed)
While the bank does not intend to signal an end to tightening, it wants to make clear that future decisions will depend on economic and price developments rather than follow a fixed timetable.
Markets are pricing an 84% chance of a December hike and 60% odds of a further increase in March, while traders assign a 20% probability to a June hike and 33% to one in July, with the policy rate expected to reach 1.985% by October 2027.
OUTLOOK UPDATE
October's Outlook Report showed the Bank's baseline scenario assumes the policy rate will rise to around 1.75% or 2% over the projection period, without specifying the timing, while core CPI inflation stabilises around 2% after core-core inflation rises above 3% towards the beginning of the next fiscal year.
One option under consideration is to modify or remove wording found in October's policy statement referring to the risk of underlying inflation deviating above the 2% target "from materialising and thereby exerting an adverse impact on the economy afterward."
The bank is unlikely to use strong language suggesting it is well-positioned to pause, but may indicate that the policy rate is approaching an appropriate level and that it has sufficient time to assess the need for further increases.
NEUTRAL RATE
The BOJ may also reassess its estimate of the neutral interest rate, currently placed within a broad 1.1-2.5% range, using more recent economic data to signal the policy rate is approaching the midpoint and discourage market expectations of further increases.
Board member Junko Koeda's mid-October remarks that the level of the neutral interest rate "is considerably above 1%, which is roughly the lower bound of the estimated range," may reflect discussions among officials about recalibrating their assessment.
The BOJ could incorporate its thinking into the policy statement following the December meeting or communicate it through a Review, similar to its March publication, Developments in the Natural Rate of Interest and the Assessment of the Degree of Monetary Accommodation.
Nov-13 06:13
Further gradual tightening of European Central Bank monetary policy looks warranted given upside inflation risks, but the ECB’s meeting-by-meeting approach gives policymakers flexibility over by how much and when rates should rise, Governing Council member Martins Kazaks told MNI.
"In my view inflation risk is still on the upside, and given that, I see that some further tightening would be necessary given the current outlook, but by how much and when, we'll see,” said Kazaks, who is also head of the Latvian central bank
Accepting that a December hike is likely, he said uncertainty in the global economy still meant things could change.
"I think you know our reaction function very well. We're looking at a wide set of variables. We are data dependent, but we are not data point dependent," he said.
"We are not providing calendar-based guidance, because the world remains uncertain. There is more than a month to go (to the December meeting), so anything can happen.” (See MNI ECB WATCH: ECB Holds, Waiting For December Confirmation)
NOT RESTRICTIVE
The governor, speaking to MNI after a conference in Riga, said monetary policy settings were not yet restrictive, with the deposit rate at 2.5%.
"2.5% is of course somewhere near the high end for the neutral rate guide, so it's not directly slowing growth,” Kazaks said.
“That does not mean that we need some kind of sequential, large increases in rates - not at the moment,” he added.
While there are currently few if any signs of second-round price pressures, Kazaks said that the longer headline inflation remains elevated, the greater the risk becomes, although their emergence is not a given.
“I don't think that these (inflation) levels -- four, four-and a-half percent -- necessarily kick off non-linearities. It might be that at those inflation levels, it's still not a trigger for non-linearity," Kazaks said.
"But it is certainly outside the inattention area, and the longer inflation remains at those levels the more it will affect household and corporate decisions," he added. "(Inflation) above 4% … starts to push (consumer) expectations more, and I would not want to see that.”
Overall, Kazaks thinks the Governing Council has adopted the correct course.
"So far, the gradual, meeting-by-meeting, no forward guidance strategy is still the appropriate one as the overall uncertainty, especially geopolitical, remains high. So there is no need to rush," he said.
FISCAL POLICY
Referring to the impact of elevated sovereign bond yields, Kazaks said policymakers must be able to act to preserve monetary policy transmission, but that the root causes of fiscal stress must be addressed by governments.
"For monetary policy to be effective, we need a transmission mechanism that works, and that's why we have various instruments to address contagion within financial markets," he said.
However, " If the repricing is due to fiscal risks, that's the responsibility of fiscal authorities."
With leading candidates for next year’s French elections making expensive promises despite the country’s already-high debt levels, Kazaks said concerns should not be exaggerated.
"If you keep asking candidates their views in the pre-election period, it's quite likely that you will not get constructive answers, because they want to get elected," he said, without directly naming France.
"Half a year will not make or break the situation, so don't jump around unnecessarily. The market signal for the authorities is there. Wait for the next presidential elections to happen to see what the elected president decides.”
Nov-12 11:18
The Reserve Bank of New Zealand risks falling behind the curve after leaving the Official Cash Rate at 2.75% in late October, as interest rate differentials with peer economies widen, the currency weakens and imported inflation remains elevated, a former senior advisor told MNI, adding that a December hike is highly likely.
Leo Krippner, now a research fellow at Singapore Management University, questioned the wisdom of the Monetary Policy Committee’s four-three decision to hold the OCR, noting its impact on the New Zealand dollar. (See MNI RBNZ WATCH: More Hikes Still Needed Despite Hold - Breman) "When that interest rate differential gets too wide, if you've got an on-hold RBNZ versus other economies hiking, that does affect the currency, and that will come through in inflation,” he argued.
The New Zealand dollar fell around 2.3% against the U.S. dollar following the RBNZ's surprise decision, briefly dropping below USD0.56. On a trade-weighted basis, the currency dropped about 1.4% on the day and remained about 0.9% below pre-decision levels as of Nov 10, according to RBNZ data. (See chart)
“[The NZD] does actually seem quite vulnerable at this level,” Krippner said, adding that the MPC is likely to raise the OCR to 3% in December, with market pricing implying an 85% probability of such a move.
While rising unemployment, falling oil prices and spare economic capacity could give the MPC grounds to hold again, Krippner argued these factors were insufficient to outweigh persistent inflation pressures. "My pick is that they do hike in December, and I also think they should hike in December," he said.
CATCH-UP RISK
The fact that the RBNZ’s September OCR track essentially incorporated two to three additional hikes raises further questions over the October decision, Krippner said. The surprise hold pushed market interest rates lower and effectively loosened financial conditions when the Bank was seeking to contain inflation, he added.
Krippner reiterated his view that the neutral interest rate was closer to 4% than the RBNZ’s estimated 3.5-3.75%, potentially leaving the Bank with more ground to make up next year if inflation pressures persist. (See MNI INTERVIEW: RBNZ Will Need 4% OCR By Mid 2027 - Ex Advisor)
He acknowledged that estimates of the neutral rate were highly uncertain, with confidence intervals typically spanning at least one percentage point. However, persistent upside inflation surprises across economies, even after excluding energy prices, suggested neutral rates might be higher than central banks currently estimate.
“Regardless of whether you say 3.75 or 4%, or whatever number you put on it … that does suggest that central banks in general have got a bit of catch up to do, and the Reserve Bank in particular has got more catch up to do because they started from a lower point and haven't really been hiking as much as some of the other central banks.”
Markets see the OCR peaking at around 3.5% by September.
DOVISH OCTOBER
Krippner said October decision’s suggested that the MPC's approach under Governor Anna Breman is more cautious than warranted by the inflation outlook.
He questioned the Bank's emphasis on inflation coming in slightly below its September forecast, noting annual inflation of 3.7% was only 0.2 percentage point below the RBNZ's 3.9% projection, while underlying inflation measures remained around 3%. He was also unimpressed by the MPC's reference to the risk of a global economic downturn, prompted by a potential correction in artificial intelligence-related investment and equity markets, which could undermine confidence and global growth.
"But in both of those aspects, the lower than expected inflation and the risk of a downturn, those are peripheral. What's in front of you is inflation at around 3%. It doesn't look like it's going down unless you get interest rates closer to neutral and maybe above neutral."
Nov-12 01:10
Comments by Bank of England Deputy Governor Lombardelli in favour of gradualism appear to mean that it will wait for clear trends in in its forward-looking data on earnings and durable price signals on the direction of energy prices before deciding on whether to hike again in December or to wait until February.
Lombardelli said at the Bank Watchers conference that uncertainty around the outlook was a reason to proceed "gradually", but she also said a December hike is plausible and did not rule out back-to-back hikes. One way to square the two is to view gradualism as signalling that the Monetary Policy Committee will not respond sharply to individual data points or to the latest developments in the Persian Gulf, absent an end to the war there, instead keeping its focus on forward-looking survey trends.
The top two factors for policy setting near term are clearly the New Year pay settlements, and the outlook for energy futures and price.
One survey "we'll be paying close attention to, perhaps as early as December" is "pay settlements next year and the factors that will be driving those," the BOE’s Director Monetary Analysis Fergal Shortall said at an agents’ briefing the day after the BOE’s 25-basis-point hike to 4.0% on Nov 5. (See MNI BOE WATCH: Hikes To 4% As Policy Not On A 'Pre-Set Path')
The BOE's firm survey, its Decision Maker Panel, which includes pay expectations, is due to be published on Dec 4 and its agents’ business survey on Dec 11, both in time for the MPC meeting ending Dec 17.
On Wednesday, the OIS market rate path priced in 18 basis points of tightening in December, after U.S. core inflation data and a hawkish message from the Federal Reserve's Christopher Waller at the Bank Watchers’ conference.
PILL COMMENTS
But BOE Chief Economist Huw Pill, also speaking at the agents’ briefing, was careful to leave the precise timing of the next move open while also stressing that the Bank is not set on a tightening path from spring 2027.
Despite the focus on whether a hike comes "as soon as December or in February ... crucially, I think there's no pre-set path for interest rates upwards in the course of next spring and beyond," he said.
The MPC has not, so far, given market participants any clear steer on which of the two months a hike is most likely to see a hike, leaving the short-end of the rate curve unanchored and moving around on news headlines.
While the position of some MPC members is clear, with Catherine Mann voting for a 50bp hike in November and therefore highly likely to back a December increase, the core of the committee has so far left its views unclear.
One thing which could prevent another hike would be a resolution of the Iran war. Governor Andrew Bailey restated at the press conference that in "the absence of a resolution of the conflict, I think that the case for a further 25 [basis points] without any commitment on when it would come would be quite strong."
Nov-11 17:12
Germany is likely growing faster than official figures suggest, a leading government advisor told MNI, adding that AI tools alone could already have raised GDP by between five and seven percentage points over what is currently captured.
Andreas Peichl said GDP could have been underestimated especially over the past few years - with the defence sector likely expanding more strongly and with AI and higher public spending both potentially adding to near term output. (See MNI BRIEF: German Economic Council Raises 2026 Growth Forecast)
“If we take the case of industrial production – how many units of a particular product have been produced, at what average price, etc. – at a limited sample of firms, it is clear there are errors,” said Peichl, Director of the Centre for Public Economics and the Centre for Macroeconomics and Surveys at ifo.
“In defence, for example, certain numbers are not allowed to be reported, which is especially significant given the current shift towards more military spending. And the same is true with some types of value-added generated through the use of data, in particular.”
Growth from extra public spending will become more visible this year and next, Peichl said, while defence-related investment should trickle down into other industries, adding another percentage point or two to GDP.
Recent ifo survey results point to a recovery in sentiment among businesses and exporters, though how much this can be attributed to cyclical factors remains to be seen, said Peichl, named as an Advisor to the Finance Ministry’s independent Stability Council on Tuesday.
“I don't know if we are through the valley with those indicators that hit rock-bottom, but right now expectations look okay. Germany has experienced so many shocks in recent years and survived," he said.
“Companies are adapting, and some – such as those that are very important in the value chain, producing computer chips or GPUs, like Zeiss – are benefitting. Nvidia is doing a lot of R&D in Germany, and there are a lot of new startups and companies emerging in different industries, though of course it will be some time before they have reached a certain size, at which point they will show up in the numbers.”
AUTO INDUSTRY CHANGING
Germany’s hugely important auto industry was slow to respond to changes in global markets, but began ramping up R&D from 2019 onwards, Peichl said.
“This led, or is still leading to, a big structural change. And if you also look at the value production index you can see that while the number of cars produced is going down, the gross value added of the car industry is not.”. (See MNI INTERVIEW: German Industry To Shrink, Re-Focus On Europe)
Yet with some 400,000 people retiring every year, demographic changes are a major concern which can only be partially compensated for by increasing labour market participation and better technology use, he said.
The rise of Alternative for Germany and anti-foreigner sentiment may make attracting a broad base of skilled workers harder, Peichl said, but "doing more to activate the domestic workforce and potentially using productivity gains from AI means there may be more politically feasible options than having a lot of migration into Germany.”
PENSION REFORM
Recent proposals by independent commissions on pension reform were good, but insufficient, Peichl said, while the compromise package likely to be agreed by Germany’s coalition government is “not good enough.”
Peichl was concerned that while additional public debt taken on to fund investments in climate, infrastructure and defence is manageable and necessary, it should not be spent on everyday consumption. Policymakers should consider new tax streams, he said, while considering whether all of the country’s nearly 500 social programmes and subsidies are necessary.
“If you look at social spending - not only of the federal government, but at all levels of government and social insurance – it’s two percentage points of GDP higher than it was before the pandemic. That’s 90 to 100 billion euros. Demographic change can only account for 0.3-0.4 percentage points of that.”
Exemptions for carbon prices, electricity taxes and supposedly temporary caps on energy prices for energy-intensive companies are an obstacle to structural change, he said.
“Clearly there are political and strategic reasons why Germany still needs to produce its own chemicals, its own steel, and so on. Only when you take today’s geo-economic constraints into account does it make sense.”
Nov-11 15:59
The Federal Reserve looks on course to raise interest rates again next month and debate a third move in early 2027 before taking a fresh look at the policy trajectory next year amid a political shift that could dampen the pace of AI investment and a likely pullback in oil prices if the Middle East conflict winds down.
The case for tightening rests on an economy that has stayed resilient since the September rates increase. Growth is running at around 2.5%, above most estimates of trend, and the labor market is solid and in balance, neither adding to inflation nor showing meaningful weakness.
Most FOMC members have stressed the need to be gradual and considered in raising rates, which suggests a predilection for hiking at every other meeting. Tuesday's firmer-than-expected CPI report, a third straight upside surprise on core inflation, not only strengthened the case for a third hike early next year after an increase in December but also potentially bolsters the view of FOMC hawks who would rather tighten more rapidly to avoid having to do more later on. (See MNI POLICY: Fed In No Hurry But Committed To Taming Inflation)
At the same time, even the most vocal hawks are not calling for a higher peak rate, which means a couple more hikes should be enough to make them comfortable that policy is restrictive.
AI-DEPENDENT
Two sources of inflation pressure -- tariffs and energy -- are shocks monetary policy cannot directly offset. They're also seen as temporary in nature, with tariff effects largely in the rearview and oil prices already taking a step back after the midterm elections.
At the same time, wage pressures are sufficiently moderate to dampen worries about the labor market as a major inflation driver. (See MNI INTERVIEW: US Labor Market In 'Quiet Steady State' - Sahin)
De-escalation in Iran and a pullback in crude would reduce the direct and indirect energy contribution to inflation and could even turn it into a drag, easing the case for further tightening and shifting the debate toward how long policy needs to stay restrictive.
Most salient for the Fed is the AI investment boom that's driving growth and lifting prices for software, semiconductors and utilities. That demand-supply imbalance is the kind monetary policy is best suited to address, and policymakers see two-sided risk to the 2027 outlook.
Faster AI investment could further strengthen demand, while an abrupt market correction as in the dot-com boom could hit investment and consumption and expose opaque financing structures. Currently accommodative financial conditions providing a tailwind to the economy may reverse.
BLUE WAVE
A Democratic Congress also raises questions about the pace of the data center and AI infrastructure buildout, particularly as state-level moratoria and permitting restrictions draw bipartisan attention. The near-term effect is likely limited, since much of the construction is already permitted and under way. But expectations for tempered spending could restrain a major source of growth next year.
"Business investment could strengthen or falter as companies learn more about the uses of artificial intelligence and governments consider policies toward this potentially transformative technology," Dallas Fed President Lorie Logan said Tuesday.
Once inflation is clearly on track back to 2%, Fed officials see a return to the policy juncture of a year earlier: returning real rates to neutral. But there will be disagreement within the committee as to what that actually means. Importantly, policymakers will also need to reassess by how much have neutral rates have risen and how much of the productivity gains from AI have materialized.
Nov-11 09:46
The People’s Bank of China needs to improve its communications to prevent market misunderstandings as it transitions its policy framework to one in which rate benchmarks play an increasingly central role, while also retaining liquidity management tools and bond transactions, a prominent economist told MNI.
For the moment, reverse repo operations and government bond transactions provide the PBOC with additional operational flexibility to manage liquidity in the event of economic weakness, financial stress or external shocks, Yu Changhua, professor at Peking University’s National School of Development, said in an interview, noting that the PBOC has continued to rely on these instruments, together with quantity-based and structural tools such as targeted relending facilities, even as it shifts towards a price-based framework.
“Rather than an incomplete reform, this reflects a pragmatic choice tailored to the current realities of China’s financial system,” Yu said.
However, the use of multiple tools risks blurring market perceptions of the PBOC’s intentions, he said, pointing out that, for example, an increase in reverse repo operations or bond purchases for liquidity purposes could be misinterpreted as a broader signal of monetary easing or a shift in the policy stance. In order to counter this, the central bank needs to articulate the objectives, tenor structures, and policy intentions behind its liquidity injections, so preventing balance-sheet operations from being misconstrued as a directional policy shift, the economist suggested. (See MNI INTERVIEW2: China Needs Monetary Easing To Boost Growth)
STRUCTURAL TOOLS
The PBOC’s structural instruments remain a key supplement to broad monetary policy in an economy with imperfect transmission of interest rates and distorted credit allocation, Yu said, adding that rate cuts alone may not be sufficient to ease financing terms for tech firms, small enterprises, and businesses undergoing the green transition. The central bank can also reshape funding conditions and risk premiums for financial institutions by expanding the eligible collateral pool, he said.
But structural and targeted tools can be overused, which would not only dilute the signalling power of benchmark rates but could potentially lead to capital misallocation, fuel financial bubbles or exacerbate industrial overcapacity, Yu cautioned, adding that the tools should be time-limited and be transparently evaluated. The economist also called for clearer boundaries between monetary policy, fiscal policy, industrial policy and macroprudential regulation.
As China’s sovereign debt market deepens and liquidity improves, the PBOC’s purchases and sales of government bonds can become a more flexible channel for injecting or withdrawing base money, reinforcing the operational framework for price-based monetary policy, Yu said. However, he noted that if the central bank were to conduct persistent, large-scale purchases of medium- and long-term Chinese government bonds to suppress long-term yields and term premiums in a bid to stimulate growth, such operations would increasingly resemble quantitative easing. (See MNI INTERVIEW: Window Of Opportunity For China Stimulus)
“This distinction is not absolute,” he said.
At present, the PBOC’s government bond transactions mainly serve as a supplementary instrument for base-money provision and liquidity management, while daily overnight reverse repo operations play the central role in anchoring short-term money-market rates near the policy rate, Yu said.
Nov-11 09:22About
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