Bloomberg: Policymakers fight the devil in front of them rather than the goblin lurking around the corner. After years of wishing and trying to bring about faster inflation, the focus is now on slowing things down. A global recession looks increasingly possible – if such a downturn isn’t already here.
It’s been an extremely discouraging week: US corporate earnings are below estimates and Federal Reserve Chairman Jerome Powell has said he’s ready to keep raising rates. In an unedifying spectacle, current and former British officials debate who is to blame for the crisis, while the Governor of the Bank of England admitted on Tuesday he felt ‘helpless’ in the face of escalating global pressures on prices. In China, a series of indicators point to a collapse in commercial activity; the economy may not grow at all this quarter, thanks to Beijing’s zero-Covid approach. Bonds are rallying as fears of another downturn fuel the desire for safe havens.
Former Fed chief Ben Bernanke recently invoked the 1970s, no one’s idea of a model decade, telling the New York Times that a version of stagflation – growth below normal and inflation still too high for comfort – is likely in the coming years. “Even in the benign scenario, we should have a slowing economy,” he said.
Bernanke knows a thing or two about business cycles. Not only was his name on the door during the 2007-2009 fiasco, before joining the Fed as governor in 2002, he was a member of the National Bureau of Economic Research’s elite academic panel that determines the start and end American expansions. . The committee said the 2020 crisis was the shortest on record, lasting just two months.
Powell, meanwhile, looks all but ready to take another downturn as the price to lower inflation. That may sound dramatic, but it’s implicit in his remarks this week that he’s ready for the economy to move beyond “neutrality,” a vague space that neither stimulates nor retards growth, to suppress the prices. He wants to “see” clear evidence that inflation is down significantly.
The risk is that the Fed is waiting for something very obvious, and the downturn is in full swing as it reacts – much like when inflationary pressures built up last year. “This approach, while warranted on upside risk management grounds, necessarily means there is a high risk that the Fed will eventually overshoot a sustainable interest rate and have to cut again, as we have. base,” wrote Krishna Guha, a Fed alumnus. staff member now at Evercore ISI.
Powell started the year pounding the price table, having spent much of 2021 touting the benefits of historic labor market gains that would bring long-term benefits to large swaths of American society. Yet when he displayed this new hawkish attitude in congressional testimony in January, it was not framed as a choice between dealing with rising prices or saving post-Covid expansion. The fight against inflation may have broad political support in Washington, a recession much less. We may be approaching a point where a doomed if you do, doomed if you don’t dynamic necessitates picking the least appealing version of hell.
The last thing Powell wants him to sound like he’s run out of options, like BOE chief Andrew Bailey (who may never live up to that remark). Central banks need to project authority. Change won’t start with a sudden shift from high hawkishness to dovishness, and it won’t happen overnight. Rate cuts shouldn’t be on the radar; inflation is too high. But there may well be a debate about how big the upcoming hikes are and how long – and for how long – they really make sense. Also, look for policymakers to note that prices generally moderate in a downturn, at least a little. While that seems a long way off, a pause in rate hikes later this year or next isn’t implausible. “A moderation or even an end to quantitative tightening would be the next step, real rate cuts the last resort, if a recession is seen as inevitable,” wrote Roberto Perli and Benson Durham at Piper Sandler. (They don’t think this will happen in the near future.)
Politics is supposed to be forward-looking, an art that seems to have been lost somewhere along the way. Which war do central bankers want to wage: the one they have under their noses or the one that comes next? It should be possible to fight the prices while thinking about how to win the peace. Civil servants should not be helpless, let alone unhappy.