Accelerate downhill. Are you going up? Avoid the elevator and try the stairs. This could well describe the change in approach to monetary policy over the past year. Most central banks have not been able to act quickly enough to calm down in the throes of the pandemic. There was a world economy to save. So what if they stick out? The worst that could happen was overheating, an acceptable risk given the alternative. Today many public servants are reluctant to do much, and certainly nothing dramatic. Growth is coming back – with vengeance in some places – and inflation is taking off. Going slowly is virtuous.
Many policymakers have emphasized their belief in the transient nature of the current inflationary rise. Their confidence is based on a few assumptions: It’s a catch-up from last year’s depressed environment, and if they’re wrong, it’s relatively easy to do. Good old-fashioned interest rate hikes should do the trick, but at the risk of engineering a slowdown too steep.
Armed with such assurances and bearing more than a few scars from the failed inflation of the past decade, central banks have come to view forecasts with skepticism. They don’t just want to project a price increase, they want to see it: “Results” has become a buzzword.
Such evidence is all the more important given the mixed signals in the midst of the covid upturn. You can have a disappointing US jobs report, for example, followed by data showing that inflation easily exceeded expectations in the same month.
Here’s where two of today’s most articulate policymakers, Federal Reserve Governor Lael Brainard and Reserve Bank of Australia (RBA) Governor Philip Lowe, deserve to be heard – the former because she is an intellectual leader of the accommodating camp of the Fed and often inclined for a senior position, the latter thanks to Australia’s perceived success.
In a May 11 speech, Brainard said, “The path to reopening and recovery – like closing – is likely to be uneven and difficult to predict, so basing policy on results rather than outlook will serve us well. ” At the RBA, which presided over more than three decades of expansion before the pandemic, Lowe talks about actual economic performance, rather than models, since the economy began to recover late last year. in our decision-making, ”he said in an October speech, a theme he often returned to.
Central banks produce tons of forecasts and forward guidance, not to mention the famous dots that indicate where members of the US Federal Open Market Committee see rates in the years to come. If the officials want us to take this paraphernalia with a dose of salt, maybe they shouldn’t put it there in the first place. Questioning the relevance of this information will only compromise its future usefulness.
This is enough to make you nostalgic for the days of Alan Greenspan, who ran the US Fed from 1987 to 2006, when information released by central banks was scarce compared to today. Current Fed Chairman Jerome Powell paid tribute to the former Fed chief during his first speech as Jackson Hole retired in 2018. The speech only reaffirmed the reputation of Powell as a plot skeptic. It also suggested that he saw merit in the simpler days when politics could tip over a leader’s sentiment about a situation.
Powell described how Greenspan resisted pressure to raise rates in the late 1990s in response to low unemployment and the accompanying idea that inflation was imminent. Greenspan had the intuition that the old models [based on the so-called ‘Phillips Curve’ of an inverse relationship between inflation and joblessness] were irrelevant and the economy could grow at a faster rate without overheating. The Fed raised the benchmark rate only once from mid-1996 to the end of 1998. Powell was clearly impressed: “Under Chairman Greenspan’s leadership, the Committee converged on a risk management strategy that can be summed up to a simple request: let’s wait for one more meeting; if there are any clearer signs of inflation, we will start tightening. Meeting after meeting, the Committee delayed rate hikes, believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually fell. “
The Fed still took forecasts seriously at the time, but they were not part of the daily talk of central banks. Public remarks weren’t as plentiful, and Fed bosses’ televised press conferences after FOMC meetings didn’t start until 2011. It all sounds like prehistory, but it might just be a guide for the future.
Daniel Moss is a Bloomberg opinion columnist covering Asian economies
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