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(10 SEPTEMBER 2017)Thought of the week:Think like a central banker
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Economic data is supportive of central bank policy tightening. Inflation measures may be a little below target, but markets pay undue reverence to these targets. Central bankers know that landing an inflation measure on a specific number is a ridiculous policy aim. As long as inflation is close to target, and not trending significantly lower, it is appropriate to use economic activity data to determine policy moves.
The activity data is supportive of tightening. The US labour market is at full employment, with anecdotal evidence of labour shortages in selected areas and wages moving higher. The European labour market is more mixed, but unemployment rates are falling towards full employment levels. Globally most economies have better growth this year than last. Economic activity is around trend. Everything is normal – except central bank policies. It is time to tighten.
The slow process of central bank policy tightening will inch forwards this month with key European Central Bank and Federal Reserve meetings scheduled.
By UBS