Joining me is James Knightley, Chief International Economist at ING.
James, great to have you here.
Thank you so much for joining me the last time you and I spoke, we have gotten inflation figures out from the US so what did you make of those Fed Reserve meeting minutes and given the fact that both WTI and Brent are back above that $100 level.
Obviously inflation is on the rise and we think it is going to push a lot higher.
We're looking for it to get somewhere between 4 and 4.5%, which is pretty uncomfortable when you're a Federal Reserve, a central bank that's going to target 2% inflation.
So I think we've got to look at it in that context.
So far it's pretty narrow.
It's pretty much concentrated on motor fuel.
It's concentrated in airline fares.
We're not seeing that much spillover, but the Fed wants to cut that off.
It wants to see no spillover at all.
The hawkish sounding commentary we got from yesterday in recent weeks as well is understandable.
They've also seen longer dated Treasury yields starting to rise quite a lot, and they want to anchor.
They don't want that to rise too far too quickly, destabilize confidence in the Federal Reserve themselves.
And so I think there is this warning shot across the bow.
Look, we're watching, we're waiting.
We don't want to hike rates if we can get away with it, but we will. and I do want to get your take on inflation expectations both near term as well as for the second half of 2026 here in the US so so far I think it's interesting that consumer inflation expectations and market expectations actually remained pretty contained.
You know you could have quite easily seen the scenario where people see gasoline prices spiking up to $4.5 a gallon and thinking wow this is going to spread this is going to push up prices, but actually.
Consumers seem to be relatively sanguine.
They're buying into this idea that it is going to be transitory.
But the risk is the longer this lasts, the smaller that you do see freight costs start to rise, you do start to see other things start to pick up that's going to make them a little bit more nervous and I think again the Fed just wanted to signal that they're watching and waiting and they've got your back if they need it and we don't have a crystal ball and neither do any of these corporations that have been reporting earnings, for example, and when we take a look at Walmart, for example, they announced their earnings and they're looking at concerns regarding rising fuel.
Costs here, but you also mention what we're seeing across the globe when it comes to treasury yields.
So the UK and Japan versus say the US What's going on and tell us about the divergence.
I think we've got to remember that the US is much more insulated from the problems in the Middle East and Japan and the Europeans are because so far we've got we've got ample energy supply.
We've got no problems with the supply issue.
It's just that we're having to pay the higher market global price for oil and in fact.
Natural gas prices have dropped lower, so as I say, we're feeling a bit of pain, but we're much more insulated, whereas in Europe and Japan they've got much broader price increases on motor fuel, on jet fuel, on diesel, but also on natural gas as well, and that's much more of an issue for them.
But not only is it a price story, there's real anxiety that they may not have enough supply.
We're in the season now that you normally see Europeans really building up their oil and gas inventories ahead of the winter that were going to come in 2026, 2027.
We're not really seeing that concern here because we've got the ample energy spike, but there there is the price shock, but also a supply shock potentially which could be much more economically damaging. focus back on over to the US here we know the Federal Reserve does have a dual mandate.
We just got weekly jobless claims which were nearly unchanged, but when we look across the board through different sectors we're hearing about tech layoffs here as well as layoffs due to artificial intelligence, but we all know that Kevin Warsh is going to be sworn in tomorrow at the White House by the president.
So tell us about the task on hand. he was always seen as a bit of a hawk when he was previously at the Fed.
Now he's changed to become a little bit more of a dove, and I think his main narrative is that he really buys into the productivity story driven by AI and technology investment.
He thinks that that means that the US economy can grow faster without generating inflation and therefore the neutral level of interest rates is actually lower, and that's the rationale that he uses to justify lower rates.
I think there is some buy-in from the Fed more broadly into that argument, but in the near term we've got the problem that energy prices are rising.
So I think fundamentally he's going to be signaling that he thinks over the medium to longer term there is a justification for moving rates lower, getting to a lower neutral level.
But in the meantime you've got to protect your credibility and you sound a little bit hawkish just to make sure to give people confidence that you've got an eye on what's going on. and James finally before I let you go I do want to ask you about what we're seeing in the currency markets in particular the US dollar at a time when we're looking at yields skyrocketing around the globe to multi-year highs.
So what are you seeing in the affects markets and are there any areas of concern here is interesting in the dollar is obviously getting a little bit of support from the geopolitical uncertainty and the safe haven status that it has, but also.
It's growing.
We've got these business surveys out of Europe today which were not great, it has to be said, and that's led to a bit of a revaluation.
So you've got a story where Europe is being faced with weaker growth and the prospect of higher interest rates because they've only got one target, not like the Fed's got dual mandate inflation and jobs.
The European Central banks just have to target inflation, so there's much greater pressure on them to respond to what's happening to inflation.
That's that's the higher rates, weaker growth in the European side lower rates and stronger growth and right now those flows are still supporting the US dollar in terms of the investment flows and the safe and finally before I let you go of course there hasn't been as much focus on the G7 finance ministers meeting or even NATO meeting in Sweden, but. rate differentials where we are right now.
I think the market is pricing some really aggressive interest rate hikes in Europe and the pricing hikes in the US as well.
We we just think that that's probably a little bit overstating the risk.
We're in a very different inflation situation in 2022 when we last had a big supply shock when everything was going up because we had dislocated.
Supply chains, energy disruption, everything was going up.
But back then we also had a massive demand shock.
We had job creation.
We had wage growth hitting 6%.
We had stimulus checks, we had record savings levels.
We don't have that demand impetus that we had back then today, so we don't think that inflation is going to be permanent and broad based.
So as a result, we do think there's a much greater chance that it's going to be transitory.
And that's why we think we have got this widening of rate differentials well the narrowing European rates rising.
I think it's overdone.
I think we'd still be looking for perhaps one hike in Europe, no hikes in the US, and actually next year we may be reverting back to rate cuts.
James, a lot to keep our eyes on and a lot to break down.
So thank you so much for sharing your insights as well as your perspective today.
Thank you.
