2. Central Bankers are Playing Dice with the Economy
- Since the start of this year, around 90 central banks have raised interest rates, with half of them hiking by at least 75-basis-points at every round, in what appears to be the race to the bottom of the economy.
- Uncertainty is being exacerbated by the fact that there is a lag between the hiking of interest rates and its impact on the economy.
God may not play dice with the universe but it appears that central bankers are more than happy to play dice with the economy.
Even when economists were warning that excessively prolonged loose monetary policy risked sparking off inflation, policymakers remained stone-faced and steely-eyed in their resolve to keep things as is.
And when their economies starting to show some fledgling signs of price pressures, central bankers brushed off these warnings, dismissing them as “transitory” and blaming it on pent-up pandemic demand.
Which is why it should come as no surprise that since inflation has proved far from transitory and as populations grow increasingly restive because of stubbornly high prices, central bankers appear prepared to tank their economies to tame the inflationary beast.
Since the start of this year, around 90 central banks have raised interest rates, with half of them hiking by at least 75-basis-points at every round, in what appears to be the race to the bottom of the economy.
The consequence of such a broad hiking cycle has been the tightest monetary conditions in over 15 years, a clear departure from the cheap money era post-2008 Financial Crisis, which investors and markets had come to view as the new normal.
Uncertainty is being exacerbated by the fact that there is a lag between the hiking of interest rates and its impact on the economy.
Making matters worse, supply shocks mean that even if the Fed hikes rates, it’s unclear if that can solve some of the more intractable problems, for instance natural gas supply in Europe and the food stocks that remain off global markets because of the war in Ukraine.
Odds are that central bankers, since they’ve set the course, can’t really afford to turn back now because that could risk a repeat of the start-stop policymaking reminiscent of the 1970s, leading to far more economic pain.
Instead, the risks are now tilted heavily towards a sharp selloff in risk assets, and until inflation looks to be convincingly under control, odds are that the U.S. Federal Reserve and its counterparts will continue to hike borrowing costs decisively.
To be sure, the global economy hasn’t seen such monetary conditions in decades and it’s hard to predict how long and how durable the damage will be, but staying in cash, especially the dollar, appears to be the least bad option in a sea of poor choices.