Central Banks Accept Pain Now, Fearing Worse Later

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A day after the U.S. Federal Reserve (Fed) sharply raised interest rates, central banks in Asia and Europe followed suit on Thursday with inflation baffling consumers and worrying policymakers around the world. launched its own campaign to suppress the

Central banks typically move slowly. Because their policy tools are dull and laggy. Rate hikes from Washington to Jakarta will affect the entire global economy and will take months to take full effect.Former Fed Chairman Jerome H. Powell likened policy decision Turn off the lights and walk in a furnished room: Go slowly to avoid painful consequences.

Still, civil servants learn from history U.S. companies, which have shown the danger of taking too long to stem price increases, have decided they can no longer afford to hold back.

Inflation has been running relentlessly fast for the past year and a half. The longer it lasts, the greater the risk that it will become a permanent feature of the economy. Employment contracts may begin to factor in rising costs of living, businesses may begin to raise prices on a regular basis, and inflation may become part of the fabric of society. Many economists believe that in the 1970s, when the Fed tolerated uncontrollable price increases for years, the “inflation psychology” took hold and later became unbearable to crush. I think

But the aggressiveness of ongoing monetary policy action also pushes central banks into new and riskier territory. By tightening rapidly and simultaneously at a time when growth in China and Europe is already slowing and supply chain pressures are easing, central banks around the world risk overdoing it, some economists warn. I’m here. It could send the economy into a deeper recession than necessary to keep inflation under control and cause unemployment to rise significantly.

“The margin of error is very narrow right now,” said Robin Brooks, chief economist at the Institute of International Finance.

In the 1970s, Fed policymakers hiked rates to keep inflation in check, but stopped when the economy began to slow.it made inflation possible stay uplifted When oil prices soared in 1979, they reached unsustainable levels. Under Paul A. Volcker, the Fed eventually raised interest rates to nearly his 20% and sent the unemployment rate skyrocketing to over his 10%.

That example weighs heavily on the minds of policymakers today.

“If we can’t restore price stability, I think we’re going to have a lot more pain later,” Powell said at a press conference Wednesday after the Fed raised rates by three quarters of a percentage point in a row. there are,” he said. The Fed’s fastest tightening campaign since the 1980s, he expects to raise borrowing costs next year to 4.4%.

of bank of england It raised interest rates by half a percentage point to 2.25% on Thursday, despite saying the UK may already be in recession. The European Central Bank expected as well Continue to raise interest rates at the October meeting to combat high inflation, even as Russia’s war in Ukraine plunges Europe’s economies into turmoil.

As major monetary authorities raise borrowing costs, trading partners have followed suit, in some cases avoiding wide swings in their currencies that could push up local import prices or cause financial instability. increase. On Thursday, Indonesia, Taiwan, the Philippines, South Africa and Norway raised interest rates, central bank of switzerland The era of zero interest rates in Europe is over. Japan has a relatively low inflation rate and keeps interest rates low. intervened in the foreign exchange market For the first time in 24 years, on Thursday, it held up the Yen in the light of all the actions by its counterparts.

The wave of central bank action is expected to have consequences, designed to sharply slow both interconnected commerce and national economies. The Federal Reserve, for example, sees the move as pushing the U.S. unemployment rate from his current 3.7% to 4.4% in 2023.

Already, the movement is starting to make an impact. In many countries, rising interest rates have made it more expensive to borrow money to buy a car or house. mortgage interest rate In the US, the housing market is cooling as it has risen above 6% for the first time since 2008. the market plummeted This year, in response to tough talks from the central bank, it has reduced the amount of capital available to large companies and cut household wealth.

However, it may take months or even years before the full effect is felt.

Interest rates are rising from lows and the latest move has not yet had time to fully unfold. In continental Europe and the UK, the war in Ukraine, not monetary tightening, is pushing economies into recession. And in the United States, where the effects of war are less severe, at least for now, jobs and the job market remain strong. Consumer spending is slowing, but not plummeting.

That’s why the Fed thinks it has more to do to slow the economy.

“We have always understood that it is very difficult to restore price stability while achieving a relatively modest increase in unemployment and a soft landing,” Powell said on Wednesday. “Whether this process will lead to a recession or, if so, how severe that recession will be, no one knows.”

Many global central bankers picture today’s inflation burst as a situation in which their credibility is at stake.

“For the first time in 40 years, central banks will have to prove how determined they are to safeguard price stability,” said European Central Bank Executive Committee member Isabel Schnabel. said at a Fed meeting in Wyoming last month

But that does not mean that the policy path being blazed by the Fed and its counterparts is unanimously agreed or unequivocally correct. pointing out.Inflation has not lasted long and supply chains appear to be healing and measures inflation expectations Remain under control.

Brooks of the Institute for International Finance sees the pace of tightening in Europe as a mistake, with the Fed also doing so at a time when the supply shock is fading and the full effects of recent policy moves are still in place. I think it’s possible to overdo it. play.

Maurice Obstfeld, an economist at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund, writes: Recent analysis It shows the risk that global central banks are not paying enough attention to each other.

“Central banks are clearly racing to raise rates as inflation hits levels not seen in nearly two generations,” he wrote. “But there can be too many good things. Now is the time for monetary policymakers to lift their heads and look around.”

Yet, at many central banks around the world, and apparently the Powell Fed, policy makers are treating it as an obligation to remain steadfast in the fight against inflation. And despite the immediate and uncertain costs, it is now turning into powerful action.

Mr. Powell once warned that moving quickly in a dark room can have painful consequences. The threat of a pierced toe still exists, but moving slowly and carefully poses an even greater danger.

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