Central banks are still missing their inflation targets

Big gaps persist despite years of monetary policy easing

Caroline Grady    

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As the world’s largest central banks resume asset purchases, the debate over the effectiveness of monetary easing rumbles on. One reason: policymakers have failed to close big gaps between average inflation and their targets.

The European Central Bank is just days away from renewing its bond-buying programme — and this time with no stated end-date. Meanwhile, the US Federal Reserve has returned to a schedule of Treasury purchases to prevent a repeat of the September liquidity squeeze in the repo market.

Investors are even weighing up the possibility of Australia adopting quantitative easing. Its policy rate stands at 0.75 per cent after three interest rate cuts in recent months, leaving little room for further easing. And the Reserve Bank of Australia has acknowledged that unconventional measures “would need to be on the table” if the economy were to take a really big hit.

However, one similarity between Australia’s central bank and its QE peers is the persistent miss on inflation mandates. Australia’s average 2 per cent inflation over the past decade falls short of its 2.5 per cent target.

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The extent of the inflation shortfall across the world has parallels with the size of balance sheet expansion. Switzerland has the largest inflation gap over the past decade at 2 percentage points. Japan has not fared much better. Both central banks now have assets in excess of national output, far above other major central banks.

The eurozone inflation gap is smaller at 0.7 percentage points and the balance sheet expansion more moderate. The ECB’s balance sheet is equivalent to 40 per cent of the bloc’s gross domestic product, a proportion that has doubled since quantitative easing was launched in 2015.

Christine Lagarde, the incoming ECB president, will have to navigate this new landscape while finding consensus within a divided governing council. With eurozone inflation dropping close to a three-year low, analysts expect bond purchases could run for several years yet.

The Fed Gives Investors a Green Light

With the Federal Reserve unlikely to tighten until inflation gets a lot warmer, rates could stay low

By Justin Lahart

Federal Reserve Chairman Jerome Powell noted that measures of longer-term inflation expectations “are at the lower end of their historical ranges.” Photo: eric baradat/Agence France-Presse/Getty Images 

The only thing that seems likely to get the Federal Reserve to raise rates again is a lot more inflation.

Until that happens, it will be giving investors a green light to buy stocks and other risky assets.

Similar occasions have had very unhappy endings.

The Labor Department on Wednesday reported that core consumer prices, which exclude food and energy items to better track inflation’s trend, were up 2.3% in October from a year earlier.

That was a bit less than September’s on-the-year gain of 2.4%, but it is significantly higher than it was earlier in the year.

Moreover, October’s consumer price level was pushed lower by declines in apparel and lodging prices—two volatile categories that will likely reverse themselves in the months ahead.

Throw in businesses’ urgency to raise prices to offset rising wages and tariff costs and inflation seems likely to get warmer.

The Commerce Department inflation measure that the Fed prefers runs cooler than the Labor Department’s, showing core prices up 1.7% on the year in September.

But it, too, seems likely to pick up in the year ahead, with many economists projecting it will rise a bit above the Fed’s 2% inflation target next year.

A bit above 2% might not be enough to move the Fed to take back any of its three rate cuts this year.

After years of low inflation, the central bank is worried that inflation expectations—which economists believe help to shape inflation’s path—have slipped to the point that it will be hard to keep inflation at its target.

Indeed, in Congressional testimony Wednesday, Fed ChairmanJerome Powellnoted that measures of longer-term inflation expectations “are at the lower end of their historical ranges.”

So the Fed isn’t likely to raise rates until its preferred measure of core inflation moves meaningfully above 2%—let’s call it 2.3%.

As Evercore ISI policy strategists point out, that differs from the late 1990s, when, after a series of insurance rate cuts, the Fed moved to raise rates again once it had an all clear on growth.

This trepidation implies an even longer sweet spot for stock market investors.

They know the Fed will cut rates again if risks to the economy emerge and that it isn’t likely to take away the punch bowl anytime soon.

A similar late 1990s sweet spot helped fuel a technology stock bubble that ended badly, contributing to the recession that followed.

The 2008 financial crisis brought home even more clearly the perils of bursting bubbles.

Asset price excesses don’t appear close to what they were in either of those episodes, but that could change.

As Fed Cuts Rates, China Has Few Good Options

The Federal Reserve cut rates again but China’s central bank has so far declined to follow suit, even with manufacturing activity on a downward slide

By Nathaniel Taplin

The world’s two largest economies are both struggling, but in one of them policy makers still have plenty of tools to respond. In the other, not so much.

The Federal Reserve on Wednesday cut U.S. benchmark rates for the third time this year, responding to weakness in manufacturing and tepid inflation. In contrast, the silence from China’s central bank remains deafening. The bank’s preferred measure of growth in economywide finance outstanding has increased by less than a percentage point since hitting a trough in late 2018.

The result: China’s October factory purchasing managers index weakened sharply, data released Thursday showed, suggesting a stabilization in investment and industry at the end of the third quarter will be hard to sustain. The drop in the nonmanufacturing index—nearly a full point to its lowest level since early 2016—was even more striking.

China’s October factory purchasing managers index weakened sharply. Photo: str/Agence France-Presse/Getty Images          

The simple reality is that even if Beijing wants to shore up growth, there isn’t much it can do in the short run. Housing prices are rising less quickly but are still bubbly. More aggressive monetary policy is certain to pump up the property market again and add fuel to out-of-control food prices, risking social discontent and more financial excesses at property developers.

The obvious solution is more fiscal support for infrastructure. But consumer price inflation running at 3% is beginning to pressure government bond yields higher too, and recent tax cuts mean local governments are even less well-placed than usual to fund infrastructure from revenues. Meanwhile, manufacturing investment remains tepid as the trade war and falling producer prices hit profits.

The results of all of this are evident in October’s PMI. Investors were cheered by an unexpectedly strong reading in September, but most of the good news reversed this month. New export orders—which were probably boosted by front-loading in September in advance of an expected U.S. tariff increase in October—dipped again. Output, overall new orders and factory-gate prices dropped as well, although the latter may partly reflect lower oil prices.

The volatile construction-sector PMI bounced back but the trend is still downward since late 2018—and that fits with weakening output of key construction-related goods like cement and steel, and gradually easing house-price gains.

All this leaves Beijing with few good policy options. A trade deal and a renewed push on deregulation and reform are needed to shore up growth. On the former, the odds appear to be even-to-good. On the latter, investors are hoping for some news out of the secretive Communist Party plenum this week in Beijing.

Since the 1980s, a pragmatic and flexible—rather than dogmatic—approach to economic policy-making has been a key strength of the People’s Republic. As the economy worsens, it isn’t clear whether the current leadership is willing to embrace that tradition.

Heart-Failure Deaths Rise, Contributing to Worsening Life Expectancy

Rate surges as population ages and health of younger generations worsens

By Betsy McKay

Marta Molina Butler of Oakland, Calif., changed her diet and started exercising more since she was diagnosed with heart failure in 2018. Photo: Isabel Molina 

Deaths from heart failure, one of the nation’s biggest killers, are surging as the population ages and the health of younger generations worsens.

The death rate from the chronic, debilitating condition rose 20.7% between 2011 and 2017 and is likely to keep climbing sharply, according to a study published Wednesday in the journal JAMA Cardiology.

The rapid aging of the population, together with high rates of obesity and diabetes in all ages, are pushing both the rate and number of deaths from heart failure higher, the study said. Most deaths from heart failure occur in older Americans, but they are rising in adults under 65, too, the study showed.

The findings help explain why a decadeslong decline in the death rate from cardiovascular disease has slowed substantially since 2011 and started rising in middle-aged people, helping drive down U.S. life expectancy.

The number of Americans who are 65 and over rose nearly 23% between 2011 and 2017 to 50.9 million, and is projected to expand another 44% to 73.1 million by 2030, according to the study, citing Census Bureau data. Some have dubbed the aging population a “Silver Tsunami.”

Stephen Sidney, lead author of the study Photo: Kaiser Permanente

“It’s just staggering,” said Stephen Sidney, director of research clinics at the Kaiser Permanente Northern California Division of Research and lead author of the study. If current trends don’t change, Dr. Sidney said, “in terms of overall burden on society, we’re going to somehow need to figure out how to take care of all those people.”

Heart failure is a progressive condition in which the heart can’t pump enough blood for the body’s needs. The risk increases with age. It can be caused by long-term high blood pressure or by damage to the heart. Medical advances help more people today survive heart attacks, but survivors are sometimes left with damage that makes it difficult for their hearts to pump adequately.

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An estimated 6.2 million Americans suffer from heart failure, according to federal statistics.

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<65 br="" years="">The American Heart Association predicts that more than 8 million will have the condition by 2030.

Heart disease, including heart failure, is the nation’s No. 1 cause of death. But taken alone, heart failure itself killed more Americans in 2017 than influenza and pneumonia combined, the nation’s eighth-leading cause of death, and slightly fewer than diabetes, the seventh-leading cause. It was a contributing factor in more than half—54%—of all heart-disease deaths in 2017, according to the study.

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Heart failure cost the U.S. health-care system $30.7 billion in 2012 and is projected to cost about $70 billion in 2030, according to a report released Wednesday by the National Forum for Heart Disease & Stroke Prevention, an organization that works to end cardiovascular health disparities. Heart failure is a leading cause of hospitalization in the Medicare population.

Marta Molina Butler was regularly fatigued and out of breath when she was diagnosed with heart failure in September 2018. The 56-year-old preschool co-director had been under stress for nearly a year, she said, caring for her husband after he was diagnosed with throat cancer. She was overweight, ate frozen and processed foods because they weren’t time-consuming to make and stopped taking walks. She didn’t regularly measure her blood pressure, though she had had problems with hypertension in the past.

“I kind of attributed some of my symptoms to being overwhelmed,” said Ms. Butler, who lives in Oakland, Calif. “They come on slowly. You adapt to them.”

Since her diagnosis, she has lost 28 pounds, started eating more fresh fruits, vegetables and lean proteins, and walks 2½ miles a day. Her husband is now cancer-free, helping relieve the stress.

“I feel like probably a better version of myself,” she said. “In some ways I’m healthier.”

She is also on several medications for her blood pressure and other problems, and is coming to terms with her diagnosis. She would like to be off the drugs, but knows she can’t. “My heart nurse has explained that they expect me to take the pills the rest of my life,” she said.

Hypertension, obesity and diabetes helped drive a 51% increase in the number of heart-failure deaths in adults under age 65 between 2011 and 2017, the study showed.

Jamal Rana, senior author of the study Photo: Kaiser Permanente

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Those risk factors are particularly worrisome because they are leading to more cases of a type of heart failure which lacks effective treatments, said Jamal Rana, senior author of the study and chief of cardiology at Kaiser Permanente Medical Center in Oakland. That condition, called heart failure with preserved ejection fraction, occurs when the heart muscle becomes stiff and can’t properly fill.

While the U.S. population under 65 is growing much more slowly, more of them have risk factors for heart failure, said Sadiya Khan, a cardiologist and assistant professor of medicine at Northwestern University Feinberg School of Medicine. She isn’t connected with the latest research and has studied heart failure in middle-aged cohorts. Young African-Americans have the highest rates of death from heart failure among people under 65, her research has showed.

“We need prevention” to address heart failure, saidKeith Ferdinand,a preventive cardiologist and professor of medicine at Tulane University School of Medicine, who also wasn’t involved in the research. That includes putting more people at risk of heart failure on blood-pressure medication, and more use of a class of diabetes drugs called SGLT-2 inhibitors that have been shown in recent research to lower the risk of heart failure.

“The way we’re going to stop these increasing burdens of heart failure and overall heart deaths is going to be controlling risk factors,” Dr. Ferdinand said. “We’re not going to operate ourselves out of these big public-health challenges.”

The Potential War Map of Eastern Europe

By: Jacek Bartosiak


Last week, I gave a birds-eye view of how Russian military policy and NATO’s Eastern European military policy shape each other. This week, I’d like to home in on the areas in which those policies would converge, starting with the Suwalki Gap.

The Suwalki Gap

The frequently cited Suwalki Gap is the only communication route connecting Poland – the operational base of NATO and the U.S. – to the Baltic states, which abut Russia and thus are vulnerable to Moscow’s military advances. This narrow area is essential to sustaining NATO cohesion and guaranteeing the collective security afforded by NATO.

In military terms, NATO’s Line of Communication, or LOC, through the gap is extremely difficult to establish and maintain; it traverses a challenging terrain over a long distance, from Warsaw to Tallinn, and since it is flanked by Belarus and Kaliningrad, it is vulnerable to Russian anti-access/area denial assets. (Indeed, the importance of Belarus and Kaliningrad cannot be overstated.

They affect NATO’s general strategy, the escalation ladder, nuclear aspects, political dimension, cohesion of the alliance, and so on.)

However, the Suwalki Gap is less important to Poland – whose independence would remain intact even if Russia invaded the Baltics – than it is to Latvia, Lithuania and Estonia. And it is far less important than the Smolensk Gate – more on that in a moment. The Baltic states are like three pieces of meat on a skewer comprising a single road route from Poland that passes through terrain less than 90 kilometers (60 miles) wide at its narrowest point.

The fact that a single LOC can be cut by a potentially hostile Russian force, therefore, demands an analysis of what it would take to discourage Russian aggression.

The Smolensk Gate

The Smolensk Gate is situated between the Dnieper and Dzwina river systems in an area that has historically been the primary avenue of invasion from Russia to Poland. The terrain itself channels the movement of military forces, rendering it the most strategic area in Central and Eastern Europe and making Belarus a key element of the geostrategic architecture of Central and Eastern Europe.

For Poland, the Smolensk Gate makes the Baltic states a secondary area of operation in any major confrontation with Russia. Poland is most vulnerable on this axis, as is Russia. Essentially, Belarus serves as the potential battlefield. NATO security policy in Eastern Europe must take this reality into account since it decouples the interests of Poland from the U.S. and the Baltic states. Russian military theorists understand as much, hence the 2016 formation of the powerful 1st Guards Army at the entrance to the Smolensk Gate.

This single Russian army has more offensive weapons than all of the Baltic states, Poland, Germany, Belgium, the Netherlands and Luxembourg combined. The covering force on this axis consists of one skeleton Polish brigade and one Polish cavalry regiment. Behind the 1st Guards Tank Army is the 20th Guards Army, which is currently being organized and which will have equally substantial firepower.

Eastern Europe is less a conventional flank than it is a strategic region with three fronts: the Baltics, Belarus and Ukraine, with Poland, to borrow a term from Carl von Clausewitz, serving as its center of gravity. NATO force deployment will determine the course of any war and thus the fate of the Baltic states, Poland and Belarus. While NATO military planners are focused on the operational-tactical issues, the alliance needs to also conceptualize the geostrategic aspects of Russian coalitional warfare plans.

To be sure, those plans exist. Since 1999, three Russian Zapad military exercises have simulated invasions of the Baltic states and Poland. Russia’s 6th Army, too, has frequently practiced invading them.

Moscow has recently reinforced the 6th Army with additional self-propelled multiple rocket-launcher systems and practiced massive notional fire-strikes against the Baltic states. As part of its force package against the Baltic states, the Russians have added artillery to the 76th Air Assault Division at Pskov.

Russia’s Point of View

From Russia’s point of view, Europe comprises three strategic directions: northwestern, western and southwestern. The western and southwestern directions in this European theater of operations include three fronts: the Baltic, the Belarusian and the Ukrainian.

Within this area, the Dzwina, Dnieper, Niemen, Bug, Vistula and Narew rivers create a complex, intersected battlefield with the massive swampy terrain of the Polesia dividing the Belarusian and Ukrainian fronts.
Contrary to the conventional wisdom that the Baltic front lacks sufficient depth to be successfully defended, the region is approximately 300 kilometers deep and features rivers, streams, swamps and densely forested terrain that impedes maneuver warfare.

The terrain provides ample opportunity to conduct defensive operations to halt rapid movement and to attrite attacking forces.

The Belarusian front, which ends at the Smolensk Gate, is located north of the Polesia and south and east of the Dzwina and Niemen rivers and features reasonably accessible terrain for at least part of the year. Forces may, at times, move reasonably rapidly. Except for the upper Niemen and Shchara rivers and their respective swampy valleys, there are no prohibitive terrain barriers preventing movement.

This has always been the shortest and most convenient approach from Russia to Poland, with staging areas near Minsk, Orsha and Vitebsk, backed by the strategic depth of Russia proper and its vast resources.

Any Russian approach along the Belarusian front will cut off the Baltic states, deny them access to their ports and may rapidly bring war to central Poland near the northwestward curve of the Vistula River, i.e. to the very heart of Poland. The geography of central Poland lures potential attackers into an area north of Warsaw that cuts the Gdansk operational line and denies any cross-Vistula reinforcement form western Poland.

Yet, that gives the defender sensible options for counteraction from the south (but east of the Vistula River) to cut the operational line of the attacking forces, provided that the attacking forces on the Ukrainian front do not threaten to flank any such counteroffensive.

The Ukrainian front of Podole, Wolyn and Ukraine proper has no substantial barriers and is perfect for mass tank warfare, except for the massive Dnieper River. East of the Zbruch River, the steppe rolls along the Dniester River with no forests or obstacles making tank use even easier.

The approaching forces may enter Poland through the permissive terrain of Przemysl Gate, which allows for a concentration of attacking forces. This region used to be perfect for massive cavalry deployments and maneuver warfare dating back to ancient times along the famous route of the big steppe nomads conquering Europe from Asia.

The last line of defense before the Vistula River and Warsaw is the Niemen and Bug rivers, which connect south with the Boh and Dniester rivers in what is now Ukraine. The area is cut horizontally by the Polesia swamps, creating two separate fronts, one of which has historically been neglected to the benefit of the other.

Napoleon neglected the Ukrainian front in the south in 1812, when he could have sealed his victory by separating grain-rich Ukraine from the Russian Empire. After seizing the Smolensk Gate, Hitler failed to exploit the prospect to close in on Moscow and instead decided to turn south to the Ukrainian front losing precious time and – as a consequence - losing the war.

In 1920, the Soviets failed to advance fast enough on the Ukrainian front, thus failing to connect with the Belarusian front units. This permitted Polish forces to defeat Soviet armies approaching on the Belarusian front in the battle of Warsaw in August and later in the battle on the Niemen River in September 1920, thereby sealing the victory in the war for Poland.

The new realities recall the contemporary Polish military and planners of the eternal patterns of the battlefield of Central and Eastern Europe, proving that continuity in geopolitics and military strategies imposed by geography is more than just a fashionable phrase.