ECB and US ‘higher for longer’ rates mantra will test markets 

In an address on Friday at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, Mr Powell said that the Fed is “prepared to raise rates further if appropriate” even as he stressed that monetary policy will continue to be shaped by economic data.

Meanwhile, European Central Bank president Christine Lagarde vowed to set borrowing costs as high as needed and leave them there until inflation is back to its goal.

“Powell clearly and deliberately restating the macroeconomic case for a hawkish bias in Fed policymaking goes a long way toward affirming the shift higher in Treasury yields over the last two months,” Citi economists Andrew Hollenhorst and Veronica Clark wrote after Mr Powell’s speech.

Ms Lagarde stayed out of the debate over whether the ECB should lift interest rates for a 10th straight time next month — even as some of her hawkish colleagues are trying to nix talk of holding fire.

The Wyoming event has often been used by central bankers as a stage for major policy pronouncements.

Last year, officials including ECB executive board member Isabel Schnabel set the tone for a prolonged assault on inflation. 

Ms Lagarde’s restraint in laying out a clear path for the coming months contrasts with her predecessor, Mario Draghi.

His 2014 Jackson Hole speech put the ECB on course to embark on quantitative easing the following year.

The former head of the International Monetary Fund has been at the ECB’s helm for almost four years, nearing the halfway point in her term. But, unlike her predecessor, famous for his “whatever-it-takes” pronouncement, she has rarely led the way on monetary policy, seeking to build consensus instead.

Her comments cap a week of dismal data from the eurozone economy. Its largest economy, Germany, is struggling to bounce back from a recession, while business surveys show the services sector following manufacturing into the doldrums.

Until Jackson Hole kicked off, the 26 members of the ECB governing council had been largely disciplined over not tipping their hand on where they stand — making it harder to predict whether hawks are in the majority, though their voices have been heard the most of late.

However, despite the darkening economic outlook, Bundesbank president Joachim Nagel said last week that it is premature to consider a pause in rate hikes with inflation still elevated.

Meanwhile, dialogue surrounding the Fed stands in stark contrast to the Bank of Japan and People’s Bank of China.

Chinese officials have steadfastly intervened to prop-up the yuan, and Japanese authorities have signalled they’re watching the yen’s movements closely.

Asian currencies have so far dropped 2% against the dollar this month, according to a Bloomberg gauge.

The yuan has shed 2% and recently fell to the weakest in nine months as the outlook over the world’s second-largest economy grows dire.

While data on Sunday showed a decline in China’s industrial profits eased in July, the slowing economic recovery and deflation risks remain an overhang for the sector. China also announced measures to support the equities market, lowering the stamp duty on stock trades for the first time since 2008 and pledging to slow the pace of initial public offerings.

The US Fed’s hawkish stance may also add to the pain of regional equities, with the MSCI Asia Pacific stocks index already on its way to posting the biggest monthly decline in almost a year.

Global funds have pulled about $5.9bn (€5.5bn) from emerging Asia stocks, excluding China, so far in August, according to data compiled by Bloomberg.

In Asia, “high-tech shares will be vulnerable should the US bond yield rise toward 4.5%”, said Toshiya Matsunami, strategist at Nissay Asset Management in Tokyo.