The world economy is racked by inflation and struggling with growth. But the situation is perhaps best summed up by one datapoint: the number and variety of policy changes announced by central banks around the world this week.
The Federal Reserve made the punchiest move. Its officials now expect core inflation — a measure that excludes the most volatile items — to settle at 4.3 per cent this year. This is a key part of why it delivered on Wednesday a 0.75 percentage point rise in interest rates; the biggest in almost 30 years. At the same time, it is starting to scale down its asset holdings — another form of tightening. The Fed wants people to see that it still has an inner Paul Volcker.
The 1980s Fed chair put the US economy through the wringer of extremely tight monetary policy to end the inflationary legacy of the 1970s. Current chair Jay Powell and his colleagues this week presented projections showing they are willing to slow the economy and raise joblessness. He sounded glum about the prospect of a 「soft landing」.
But for all the downgrading of forecasts, it is important to keep the Fed』s doom in context. Its rate-setters are still forecasting a reasonably benign scenario. They think growth will continue and the most pessimistic forecast is for unemployment at 4.5 per cent.
The Bank of England would do anything for such a happy outcome. This week it raised rates by just 0.25 percentage points, even though inflation is expected to hit 11 per cent. But the BoE expects economic stagnation anyway, so does not need to tap the brakes as firmly as the Fed.
The European Central Bank, meanwhile, is reliving chapters from its eurozone crisis history books. Investors are jitterier about high-debt eurozone governments, leading to some states in the monetary union suddenly facing higher borrowing costs. The ECB called an emergency meeting to announce measures to deal with this 「fragmentation」, and hold the financial system of its caravan of countries together.
This has all been hard for investors to follow. Global stocks overall are down on fears of higher borrowing costs and recession, though there were some glimmers. The Fed decision actually led to a rise in share prices, with the S&P 500 up by 1.5 per cent on Wednesday, largely because Powell said the Fed might make smaller increases in future. But it fell by twice as much on Thursday thanks to an unexpected rate rise by the Swiss central bank.
The big picture running through these decisions is that stagnation looks more likely than it did last week. This was a week of sudden moves by central bankers — and after a long period when they could fairly be criticised for being too slow. The changes this week should nonetheless be welcomed.
This is, fundamentally, a hard time to do the job. The war in Ukraine continues to drive inflation while weighing on growth. Covid-related lockdowns in China may continue having an effect on supply chains. The world economy is facing fast-moving supply pressures, and central bankers are stuck with a slow-moving demand-side toolbox. Furthermore, uncertainty is unusually high. No one has a grip on how strong these unique inflationary pressures will be, nor the effect on growth, trade, jobs and incomes.
This week』s sudden lurches by central banks came in response to genuinely new economic information: higher-than-expected consumer prices, some fast-rising eurozone bond yields and a jump in US inflation expectations. Economic policymakers』 strategies ought to be data-dependent, not dogmatic. And that means, at a moment when the data keeps moving, so will their policies. Expect turmoil ahead.