Pandemic heroics for once feted, most central banks now face an uneasy crowd

By Howard Schneider, Julie Gordon and Leika Kihara

WASHINGTON, June 17 (Reuters)Global central bankers, who are skirting for a pandemic-driven depression two years ago, are now stumbling through the aftermath as they try to quell an inflation surgeon none predicted or have able to forestall.

If their response to the economic crisis triggered By the pandemic bold and forward-looking, with its laundry list of new programs and massive monetary stimulus, the last few months have been an erratic, even awkward phase of failed forecasts, embarrassing mea culpasincreased political scrutiny and some evidence of lost trust.

Managing inflation is the core of a central bank’s mission, and the major players from the US Federal Reserve and the Bank of Japan’s regional institutions like the Bank of Canada and the Reserve Bank of Australia recent events They have a blow to their credibility as they play catch up policy and, in the process, raise the likelihood of recession.

“They had horse blinders. They did not want to entertain any talk of stability or upside risk,” said Derek Holt, head of capital markets economics at Scotiabank in Toronto. . “I think they had proof that even 2020 was unfolded,” he said, “yet another year for emergency programs to be held.

The result: Fed has whipsawed a little more than a week financial markets with a A 75-basis-point interest rate increase, the size of its first hike since 1994; The European Central Bank scrambled towards new emergency plans to control government bond spreads; The Swiss National Bank approved an unexpected rate hike; Bank of England forecasts hinted at a growing stagflation; And Bank of Japan Governor Haruhiko Kuroda was forced to apologize after stinging criticism of households that had become “accepting” higher prices.

Kuroda’s predicament was emblematic.

Inflation in Japan crept just over 2% on an annual basis Increasing consumer prices have seen the United States increasefor example, and more than likely the BOJ’s 2% target after years of concern about deflation of the opposite problem.

Yet, the central bankers and the higher authorities have found that the higher the prices, the more likely they are to have a generation after fast relearning.

“Every single one of these central banks is operating in some kind of risk management framework and really from the (2007-2009) financial crisis … the race was going to the outerase.” The low and even falling price environment, said Ed Al-Hussainy, of Columbia Threadneedle, a senior rates analyst. “Now that is going in reverse … The risk of error has shifted to the other side of the street,” he said.

BLINDSIDED

Critics say the central banks themselves have the right to keep the interest rates for the very low, and the printing too much money for the economy to absorb – a supply of goods and services which have their own setbacks.

The central bankers argue that much of the current price shock is beyond their control, with inflation made more intense and persistent events such as the Ukraine war or the still uncertain return of China to its place in the global goods supply chain.

Whatever the causes, the impact has been felt by households. Central banks ‘own reactions to their peculiar 2% inflation targets are likely to hit the central bank’ s own reactions.

After the Fed unveiled its huge rate hike on Wednesday, Chair Jerome Powell was tying in on the blunt the historical action The Fed was losing the battle in shaping public expectations about inflation.

Some economists downplay such expectations, measured households, as being Gas and food prices that are overly sensitive are those that are excluded from the “core” inflation trends in a given monetary policy.

But “headline inflation is what people experience,” Powell policy decision after a news conference. “What they don’t know is the ‘core’. Why would they? They have no reason to do so.”

“Central banks have persuaded themselves that the longer-term inflation expectations are the whole story,” said Karen Dynan, nonresident senior fellow at the Peterson Institute of International Economics and at a professor Harvard University. But “people look backwards too, and there is inertia. They think about what changes in wages and prices help keep them up,” and begin demanding them in ways that drive prices and wages higher.

If households are getting less trustful, politicians are taking note as well.

Bank of Canada governor Tiff Macklem has called for his removal, and the central bank has promised a public vetting of its mistaken inflation forecasts this summer. Australia is planning a review of central bank operations after the Reserve Bank of Australia’s misreading of inflation led to an increase in the start-up rate that it said last May. borrowing costs in rises until 2024.

Powell next week will testify twice before lawmakers in the US Congress as part of his regular biannual monetary policy updates. The sessions will likely focus on the threat of high Inflation and what’s become the central question as interest rates spike and key markets begin to slow: how bad will it get?

Maintaining central bank independence “was easy when central banks were making progress – not a situation deteriorating,” said Vincent Reinhart, a former Fed official who is now chief economist at Dreyfus and Mellon. He noted that when collective missteps occur, “the tightening spell of the relatively easy part,” when rates are rising to near zero and the price to be paid in terms of slower economic growth and higher unemployment, is not yet apparent.

“What happens when you get closer to the destination … but the destination is much less popular. That’s where they are headed.”

GRAPHIC-Central Banks opt for shock and awe to tame inflation

(Reporting by Howard Schneider Additional Reporting by Julie Gordon, Leika Kihara, Sam Holmes, Balazs Koranyi and Wayne Cole Editing by Paul Simao)

((howard.schneider@thomsonreuters.com; +1 202 789 8010;))

The views and opinions expressed herein are those of the author and do not reflect those of Nasdaq, Inc.

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