The US Federal Reserve (Fed) and the Swiss National Bank (SNB) are both grappling with economic challenges that influence their monetary policies. The Fed both is and isn’t feeling pressure right now, as high inflation rates in the United States act like a double-edged sword. At the same time, the SNB is concerned about the weak economic momentum in Switzerland. As both institutions near year-end analysis, their decision-making will be increasingly governed by recent economic data and outlook for inflation going forward.
First, the Fed’s inflation target. The Fed has a long-run goal of 2% inflation per year. With the added challenges due to COVID-19, achieving this has become more challenging than ever. This next Consumer Price Index (CPI) report is likely to be the most consequential since it will shape how things go for the Fed’s monetary policy. Recent data is beginning to show that price pressures in the US are escalating. Further complicating the situation are ongoing supply-chain challenges and persistent constricting bottlenecks, which are all driving this escalation.
Inflation Pressures in the United States
The CPI has hit multi-decade highs in recent months, alarming both policymakers and economists. As it approaches the final months of the year, the Fed has acknowledged some tentative signs of improvement. Despite this, the inflation narrative remains concerning. Soaring consumer prices are the primary political challenge and the economic justification for the Fed’s actions to achieve stabilization.
Federal Reserve Governor Christopher Waller reminded that in the face of these inflationary pressures an incremental approach would be appropriate.
“Because inflation is still elevated, we can take our time — there’s no rush.” – Christopher Waller
Waller’s dovish tone may reflect a minority sentiment among Fed officials. They seem to want to ease into the idea of raising interest rates. This view stands to weigh any meaningful rebound for the US Dollar. The markets are soaked with uncertainty about what the Fed will do next.
Swiss National Bank’s Economic Outlook
On the other side of the Atlantic, the SNB has a very symmetric monetary policy framework. At the same time, consumer price inflation in Switzerland has dropped sharply in recent months, down to 0.0% (flat) in November. This is an enormously important change for the Swiss economy, which has long valued low rates of inflation. Employment growth in Switzerland came to a standstill over the July-September period. This has driven the seasonally adjusted jobless rate up to about 3.0% in November.
Second, the SNB has pointed to a loss of economic momentum. So, in their view, the inflation outlook still has not changed sufficiently to justify any near term changes in policy. This seemingly cautious position reveals a bite of confidence in ultimately keeping the SNB on its current path—in light of uncertain economic conditions.
Divergent Paths Amid Global Economic Challenges
Yet as both central banks continue to chart their own paths, their policy choices may affect the rest of the world’s markets much more. The Fed’s focus on inflation and employment contrasts with the SNB’s observations of stagnating economic activity in Switzerland. The dynamic between these two central banks will be key as they both react to shifting economic data points.
As we continue to see supply-chain disruptions impact both countries, it is ever more important for both banks to be on the lookout. With these changes, we now expect the Fed to formulate its policy response on the next several CPI reports. At the same time, the SNB will be monitoring developments in employment closely.