Central banks have been fumbling with inflation for years, and it’s safe to say they’ll never get it right.
Their strategies are flawed, and they’ve shown time and again that they have no clue what they’re doing.
The Fed’s panic cut
Let’s start with the Federal Reserve. They’ve been hiking rates like it’s a contest, and then slashing them when things get shaky.
Back in the mid-90s, Alan Greenspan managed to double rates to 6% without causing a recession. That was their last successful maneuver.
Back to more recent times, inflation in advanced economies shot past 7% last year, while emerging markets nearly hit 10%.
Jerome Powell tried to bring back that magic, but these are different times. Prices spiked after the pandemic and the Russia-Ukraine mess, and it caught the Fed off guard.
Despite Powell’s claims, the U.S. economy is anything but stable. GDP might have grown by 0.6% in Q2, but it’s a fragile recovery.
Inflation isn’t just going to vanish because they cut rates a few times. Central banks are patting themselves on the back for not letting things completely collapse.
The Fed’s half-point rate cut was an attempt to signal control. Powell called it a “recalibration,” but it’s just a reaction to market pressures.
The Fed is playing catch-up, and everyone knows it. The real problem is that they’re stuck.
They can’t hike rates too much without risking a recession, and they can’t cut too much without letting inflation spiral again.
The ECB’s struggles
The European Central Bank is no better off. Inflation in the Eurozone was 10.6% last October and has now dropped to 2.2%. Sure that looks good on paper, but reality begs to differ.
Yannis Stournaras, governor of the Bank of Greece, is bragging about bringing it down in 18 months without a hard landing. Not really a victory if you ask me.
The ECB had to raise rates by a ridiculous 450 basis points in just over a year to get there. They’re not in control; they’re just lucky.
Austria’s central bank governor, Robert Holzmann, who was against the first rate cut in June, changed his mind by September.
Now he’s backing more cuts, predicting another 100 basis points of reductions by mid-2025. Why? Because Europe’s in a tight spot.
Domestic demand is weak, and the ECB has no clear plan. They’re saying rate cuts will continue, but the speed is uncertain. Stournaras calls it “optionality,” but it’s really just guesswork.
Bank of England’s hesitancy
The Bank of England (BoE) is another example of central bank incompetence. They’ve been dragging their feet on rate cuts. A single quarter-point cut in August after a year of doing nothing.
Andrew Bailey, the governor, is too cautious. Unlike the Fed and ECB, the BoE is slow to react, and it’s hurting the UK economy.
The Monetary Policy Committee couldn’t even agree on a clear direction. They laid out three different inflation scenarios, showing just how divided they are.
Bailey hinted at more cuts, but with so much uncertainty, no one knows what’s next. The BoE is lost, just like its peers.
The elusive neutral rate
One of the biggest challenges for central banks is figuring out the “neutral” interest rate. It’s supposed to be the rate that doesn’t stimulate or slow the economy. But what’s the right number?
Before the pandemic, the Fed thought it was around 2.5%. Now, they have no idea. Powell admitted it could be “significantly higher” due to higher debt and supply chain issues.
These guys are betting with our economies.
And get this. Christine Lagarde, the ECB president, said the world is still reeling from the worst pandemic since the 1920s, the worst European conflict since the 1940s, and the worst energy shock since the 1970s.
It’s a perfect storm, and central banks can’t even agree on what “normal” looks like anymore.
The fear now is that new shocks will hit before they’ve got this mess sorted. Stock markets are already reacting to expected rate cuts, loosening financial conditions.
In the U.S., fiscal policy is loose, which could limit the Fed’s options.
Geopolitical tensions, potential trade wars, and the possibility of Trump returning to the White House all add to the uncertainty.
More tariffs, renewed trade conflicts with China – it’s all on the table.
Christine said, “uncertainty will remain higher” and central banks need to manage it better. But she’s predicting a recession for the global economy in the near future.
Kristalina Georgieva from the IMF called it a “difficult balancing act,” adding that:
“They must ensure that inflation sustainably returns to target and remains there while avoiding the risk of excessively tight policies. While clearly weaker than we would have wanted, economic activity has been remarkably resilient. While inflation is retreating, rates are going down. Recession appears to be unlikely.”
Cryptopolitan reporting by Jai Hamid
Source: https://www.cryptopolitan.com/central-banks-didnt-get-inflation-right/