The era of the World Central Bank may have arrived
According to the World Bank, we are witnessing one of the most synchronized periods of monetary and fiscal tightening in the past five decades. While the Federal Reserve may steal the show on Wednesday with a third consecutive hike of 75 basis points, prices are almost certain to rise in the coming days in places as diverse as the UK, Indonesia, the Philippines and Norway. Earlier this month, the European Central Bank pulled the first 75 basis points jump, leaving the door open for more. Sweden’s Riksbank shocked the markets on Tuesday by raising its key interest rate by a full percentage point.
It is the countries that have not raised their borrowing costs – often by large margins – that stand out. The global central bank era may be with us in everything but the name, as far as policymakers themselves may be concerned by the proposal. About 90 central banks have raised interest rates this year, and half have increased by at least three-quarters of a percentage point within one frame, based on Bloomberg News calculations. This week’s increases alone could exceed 500 basis points.
Even outliers are less than comfortable. The Bank of Japan, which has refused to budge, faces tough questions about why it is holding a very easy stance when inflation has really breached its 2% target. Inflation jumped last month to its highest level in more than three decades. China is trying to support a shaky expansion, even though the authorities fear inflation and are reluctant to unleash massive stimulus. (Such an approach by the People’s Bank of China would be limited in effectiveness, given Beijing’s Covid-Zero strategy of shutting down megacities.)
He is a brave central banker who worries very loudly about other countries when the headlines scream about inflation at home and politicians pile up. Most monetary agencies have at least some autonomy, but they still operate in a political environment. Policymakers face hostile questions in parliamentary hearings and some lawmakers go so far as to demand resignations. This is an understandable, if disappointing, reaction when jumps in the CPI headline the evening news. If officials have concerns about the underperformance of the global economy – and there are good reasons for concern – they tend to remain publicly silent about it.
One person who has pointed out the need to think globally is Federal Reserve Vice Chair Lyle Brainard. While it has not for a moment defied the desire to rein in demand and prices, it has watched for the potential consequences of global policy style. “The speed and global nature of the tightening cycle, as well as the uncertainty about the pace at which the effects of tighter financial conditions run through aggregate demand, create risks associated with excessive tightening,” Brainard said in September. 7 speak. The bleak global outlook may also prevent the Federal Reserve from moving a full percentage point today, according to Bloomberg Economics.
In other words, the collapsing world image would prevent the transformation of a gigantic height into a gigantic height. But this is about that now. While World Bank economists don’t have a global recession as their primary scenario, they are pessimistic. Drawing on insights from previous recessions, a research paper released last week suggested that every single drop in the world since 1970 presaged significant weakness in the previous year. “These developments do not bode well for the prospect of avoiding a global recession,” Justin Damien Gwinnett, Ihan Kose, and Naotaka Sugawara wrote. They said it might conceivably resemble a 1982 model. This was the slide that followed then-Fed Chairman Paul Volcker’s attack on inflation. While inflation was overcome and Volcker secured his place in the structure of economic history, the economy was stifled in the process.
There is a risk today that, based on domestic concerns, the response to higher inflation will bounce back well beyond national borders. According to Guenette, Kose, and Sugawara, “Because these policies are largely synchronized across countries, they may mutually exacerbate their effects—tightening financial conditions and slowing global growth more than previously envisaged.”
A rallying cry for central bankers, whenever politicians fuss about rates, is to protect independence at almost any cost. But what about the independence of central banks from each other, especially the Federal Reserve? The effect of the whole may be more consequential – and deeply felt – than the sum of the parts. An atlas may be as useful as a raster chart at this point.
More from Bloomberg Opinion:
• If the price increase is on autopilot, just say it: Daniel Moss
The case against a massive 1% Fed rate hike: Robert Burgess
The Federal Reserve Wants to Save America, Not the World: Marcus Ashworth
This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for Economics.
More stories like this are available at bloomberg.com/opinion