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Central Bank Interest Rate Policy Amplification In One Picture

Most of the major central banks are all leaning the same way. What can go wrong?
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Central Bank Policy Amplification

Monetary Policies Risk a Historic Global Slowdown

With a major ongoing debate as to how many rate hikes will  take to slow inflation, the PIIE says Uncoordinated Monetary Policies Risk a Historic Global Slowdown.

Central banks nearly everywhere feel accused of being on the back foot. The present danger, however, is not so much that current and planned moves will fail eventually to quell inflation. It is that they collectively go too far and drive the world economy into an unnecessarily harsh contraction. Just as central banks (especially those of the richer countries) misread the factors driving inflation when it was rising in 2021, they may also be underestimating the speed with which inflation could fall as their economies slow. And, as often is the case, by simultaneously all going in the same direction, they risk reinforcing each other’s policy impacts without taking that feedback loop into account. The highly globalized nature of today’s world economy amplifies the risk.

Uncoordinated or Coordinated? 

PIIE cites a risk of "Uncoordinated" Monetary Policies. 

Given most central banks are doing the same things, is policy coordinated or uncoordinated?

The question is moot because the point is understood. Central banks are for the most part all leaning the same way. 

Synchronized policy actions seems to be a better description of what's going on than either coordinated or uncoordinated.

This isn't new. It's mostly been going on for decades. Japan is an exception, trapped in its own alternate ZIRP universe forever. China is also currently outside the norm. 

By the way, isn't it time to finally for writers to stop labeling China as an "emerging market"?

Regardless, China is caught in a property bubble bust and is still trapped in export mercantilism, so it does not want to hike rates. 

For discussion, please see China Is Not Rebalancing, Its Flawed Dependence On Huge Exports Continues

Procyclical Synchronized Policy

Coordinated or not, central banks tend to lean the same direction. 

This has a tendency to amply things over time such as global housing and stock market bubbles (and resultant crashes). 

The economic wizards all failed to see the massive inflation of the largest fiscal and monetary stimulus in history.

Now the risk is an overshoot in the opposite direction, something I have mentioned several times over the past few months.  

The Fed Will Hike to 4 Percent Come Hell or High Water

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On September 9,  former Fed Vice Chair Richard Clarida said The Fed Will Hike to 4 Percent Come Hell or High Water

Q: Is the fed data dependent or are they going to 4% come hell or high water.

Clarida Response

  • I think they are going to 4% hell or high water if I had to out it into two boxes.
  • Inflation is way too high. Inflation was way too high last year.
  • Until, inflation comes down, the Fed is really a single mandate central bank.
  • They are data dependent but the inflation data is too high. So I think they are going to at least 4%.
  • I agree it's not a great place to be in. If it was just Putin, you are right. But unfortunately the economy is out of balance now. 

Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

On August 19, I commented Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

On August 26, at Jackson Hole, Fed Chair Jerome Powell Pledges to "Act With Resolve" to Beat Inflation

Key comments: "Reducing inflation is likely to require a sustained period of below-trend growth."

Also note The Fed is Openly Cheering the Stock Market Plunge Following Jackson Hole

Stocks are priced for perfection, not a long period of weak growth, and with the Fed openly cheering their demise.

Fed presidents are all group-think bureaucrats who haven't a clue on on what inflation is (on the way up or down). 

Inept fiscal policy is also in play. For example, Climate Policy Is a Much Greater Threat Than Climate Change

Powell will not want to risk getting blamed for another round of global inflation. As Clarida commented, the Fed is really a single mandate central bank.

Add it all up and the Fed is poised to overshoot. 

This post originated at MishTalk.Com.

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