After the most radical monetary tightening movement For four decades, academics and economic practitioners have been dissecting how to avoid a cost-of-living crisis and how to ensure that the same mistakes are not repeated.
The market has raced to price long term high interest ratesNew wars in the Middle East add more risks to an already uncertain outlook for central bankers as they meet for their penultimate meeting of a tumultuous year.
Policy self-examination mainly revolves around three arguments. How much flexibility central banks can have in achieving their inflation targets, the effectiveness of asset purchases in their policy mix, and the merits of monetary and fiscal coordination.
Bloomberg surveyed economists around the world to gather opinions on the three debates.Their conclusion is that the central bank will not rush to achieve the inflation target and destroy the economy, and will use quantitative easing and fiscal policy more cautiously in the future. risk response The work of monetary authorities.
What does Bloomberg Economics say…
“A long period of skyrocketing prices, and concerns that getting within the last few yards of target may be the most painful for workers, has reignited the debate over whether central banks should be targeting higher inflation. It’s a conversation worth having. “But for monetary policymakers, the need to maintain credibility means the right time is after inflation returns to target, not before.”
—Tom Orlik, Chief Economist
Rethink goals
As long as people believe prices will return to 2%, central bankers have some leeway to decide how aggressive they need to be to achieve that goal.
Economists at 16 of the world’s most important central banks said policymakers would give more time to get inflation back to target if it meant less damage to the economy. Bloomberg’s special survey also showed that a significant number of people believe they will go further and accept price pressure that is slightly too strong or too weak – as long as expectations remain stable.
Former IMF chief economist Olivier Blanchard has long advocated raising the inflation target, and former European Central Bank deputy president Vitor Constancio has also expressed support for raising inflation targets. Expanding goals. Embrace This idea. But this is a controversial view and is only possible if it is credible, meaning the central bank may have to get inflation back to 2% first.
“It would be a big mistake to think that if you can’t achieve the goals you set, you can change the goals,” Bundesbank President Joachim Nagel said.
Global trends suggest inflation will be stronger than in the past, with former Bank of England governor Mark Carney and others saying interest rates will not return to pre-pandemic lows.
One lesson Gita Gopinath, the No. 2 at the IMF, has learned from the recent inflation episode is that policymakers must not assume that it is best to look at supply shocks, as textbooks suggest Responses. She advised them to be prepared to preemptively strike even if inflation is not yet out of control.
they may be Action will be taken soon In this regard, if the conflict in the Middle East escalates oil transportation.
However, when the next global economic slowdown arrives, flexibility may need to be maintained in another way. Europe’s eight-year experiment with negative interest rates ended last summer, with mixed reviews about whether it was all worth it.
The Bank for International Settlements believes that there is greater tolerance for the persistence of even modest deficits because “low-inflationary regimes have self-stabilizing properties compared to high-inflationary regimes.”
Rethinking quantitative easing
A more flexible approach to the 2% target would have seen very different monetary policy in many parts of the world following the 2008 financial crisis. Trillions of dollars, euros, yen and pounds of asset purchases did little to lift prices in the face of global deflationary forces until governments used the funds raised to stuff cash into consumers’ pockets during coronavirus lockdowns.
But it has also been blamed for distorting financial markets. Number of episodes Some believe the collapse of Silicon Valley was a direct result of central bank reserve creation under quantitative easing and regulatory failures.
Only 40% of economists surveyed predicted that the central bank would use quantitative easing as before. A quarter expect they will deploy it more cautiously, around 30% think its only role in the future is as a tool to address financial stability issues, and a smaller minority think it will not be used again at all.
There are other issues with bond purchases that could affect how they are used in the future. Quantitative easing effectively transforms long-term borrowing costs into short-term borrowing costs. What was a lucrative deal for taxpayers when official rates were lower has now turned into a disastrous one.
The problem is most clearly illustrated in the United Kingdom, where the Bank of England has ensured taxpayer compensation for any losses caused by quantitative easing. It is estimated that government procurement costs will exceed £200 billion ($243 billion) over the next decade.
Policymakers have little experience When shrinking balance sheets, small mistakes can trigger big market turmoil.
The Fed experienced some of this when it tried to reduce its bond holdings between 2017 and 2019. Recent efforts to reduce the portfolio have gone fairly well, in part because the central bank has accumulated so much debt over the years that it is still far from any threshold. This triggers a squeeze.
But the fact that they view quantitative tightening as a technical tweak rather than part of an effort to overcome inflation raises questions about the future use of a tool that only works one way.
As it operates within a 20-nation monetary union, the ECB faces additional legal burdens in holding bonds.Concerns about illegal government financing debt mutualization The central bank has been taken to court several times.
mixed policy
Low interest rates and a massive quantitative easing program have allowed the Treasury Department to borrow cheaply to fund stimulus programs, protecting labor markets, businesses and consumers from collapse. But a spurt in spending during and since the pandemic — partly critical emergency funding, partly the political need to pull out all the stops in a crisis — has led to the latest burst of inflation.
While the same pull in the same direction is needed to curb demand, many governments worry that if they Policies are too tight, voters will push them out and replace them with populists or extremists. This has once again raised questions about whether the central bank can achieve price stability on its own.
“If we were to design optimal policy arrangements from scratch, both monetary policy and fiscal policy would have a role to play in managing the economic cycle and inflation, and would be closely coordinated,” Philip Lowe said in his final speech as RBA governor expressed in. September.
Economists surveyed by Bloomberg predict that fiscal policy will offset to some extent the Federal Reserve’s efforts to control U.S. inflation.
“It’s true that in some cases it helps to work together and support each other,” European Central Bank President Christine Lagarde said during a panel discussion at the institution’s annual economic forum in June.
Fed Chairman Jerome Powell, who sits to her right, said he was not prepared to rely on such cooperation. “Our mission is to achieve price stability, regardless of the fiscal policy stance.”
Central bankers have warned that any failure to reduce fiscal spending risks risking higher interest rates. They also want elected officials to enact policies that will help achieve sustainable growth.
“The way of thinking needs to change,” said Agustin Carstens, former president of the Bank of Mexico and current managing director of the Bank for International Settlements. “Growth requires less reliance on fiscal and monetary policy and more reliance on structural policies.”
Svlook
