European Central Bank President Christine Lagarde has lately also turned more hawkish than she previously indicated, and the Reserve Bank of Australia is among those raising rates faster than policy makers had signaled.
The blunders by monetary mavens tarnish a reputation of ensuring price stability and preventing the kind of inflationary spiral that hammered middle-class incomes in the 1970s. The loss of credibility means even greater policy action may be needed to defuse price pressures.
Belief among households and companies that central banks will succeed in meeting their inflation goals over time helps to moderate price pressures. Households might hold off on some purchases, confident some prices will come down in time. And workers would be less likely to embed cost-of-living compensation demands in wage talks.
“Central banks are in a dilemma,” said Sayuri Shirai, a former Bank of Japan board member who’s now a Keio University professor. “To restore confidence, central banks need to raise policy rates” sufficiently to bring down inflation, and that “may lead to a further slowdown in the economic recovery,” she said.
The Federal Reserve is now expected to hike interest rates by 75 basis points Wednesday, just weeks after Chair Jerome Powell and his team repeatedly advertised a half percentage point move. It’s the latest in a series of misfires, from deeming high inflation “transitory” last year to speeding up the end of its bond-purchase program to accelerating the runoff of its bond portfolio.
Investors are casting judgment as they fret that the race to make up for past forecasting errors raises the risk of recessions. Global stocks have entered a bear market, US Treasury yields on Monday posted their biggest two-day jump since the 1980s and credit markets are showing signs of increasing stress.
Policy makers until recently highlighted that long-term inflation expectations were contained — a testament to their credibility. Federal Reserve Bank of Chicago President Charles Evans explained in March that current-day inflation wasn’t like the 1980s because “overly accommodative monetary policy” in the 1960s and 1970s had contributed to a buildup of long-term inflation expectations.
Friday’s University of Michigan gauge of longer-term price expectations showed a major crack in that narrative, jumping to the highest since a 2008 oil-price spike.
The Fed, ECB and its peers can’t be blamed for failing to anticipate the price surges stemming from Russia’s invasion of Ukraine or, arguably, the duration of global supply-chain challenges.