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The Rate-Hike Bidding War Can End Now

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Recession is stalking markets and stagflation is on traders’ lips. Russia’s invasion of Ukraine has pummeled stocks and sent the prices of wheat, corn, oil and copper through the roof. It’s a dire cocktail for central banks, which just weeks ago were grappling merely with the most rapid pace of price increases in decades. This was supposed to be a year of interest-rate hikes and scaling back pandemic stimulus. That is still on the cards, but unexpectedly sharp moves higher in borrowing costs — just for the sake of preserving credibility — will come with costs. And yet, despite the drama, most economists haven’t budged from their base case that the Federal Reserve will raise rates about half a dozen times this year. The Bank of England is seen as a consistent hiker. Reserve Bank of Australia Governor Philip Lowe said little in a speech Wednesday to dissuade economists that liftoff is approaching, and a clutch of emerging markets such as Indonesia have signaled they are ready to move as soon as the ink is dry on the Federal Open Market Committee’s statement next week. The only major players that appear to be equivocating are the European Central Bank and the Bank of Japan, the latter always unlikely to step away from quantitative easing. When a well-credentialed dove like Charles Evans, head of the Chicago Fed, countenances a hike at each FOMC meeting you know the direction of travel. Case closed, right? Fed Chair Jerome Powell effectively pre-announced a quarter-point hike on March 16 when he testified to Congress last week. Going far beyond that, however, doesn’t have a strong precedent. It’s been decades since the Fed, from which so many monetary authorities around the world take their cue, has contended with a serious level of inflation and a softening of economic activity, perhaps even a slump.

The knee jerk response of most central bank watchers, presented with the choice of evils, would be to crack down on inflation first and worry about growth next. That assumption hasn’t really been tested in at least a generation. The Fed & Co. may be behind the curve, but will they pay any price to get ahead of it?     Monetary chiefs will likely be extremely careful and don the mantle of wartime leadership, knowing the world hangs on their words. Former ECB President Mario Draghi’s “whatever it takes” line in 2012 set the standard. Exuding a similar confidence and sense of stability was on Alan Greenspan’s mind when, as Fed boss, he addressed the FOMC in August 1990, shortly after Saddam Hussein’s conquest of Kuwait sent energy prices soaring. America sank into recession the previous month.(1) Greenspan sought the appearance of keeping policy relatively tight despite the darkening economic picture and officials’ concern about the health of the economy. But the chair also had a higher calling: the need to signal that adults were in the room. (Leaving it to the political class was risky.)  He opted to keep rates unchanged. “It has to be the central bank. It’s got to be we!” Greenspan declared to his colleagues, as Sebastian Mallaby wrote in his 2016 book “The Man Who Knew: The Life and Times of Alan Greenspan.”A few months later, Greenspan was cutting rates as the economy weakened. In the build up to, and during the U.S. invasion of Iraq in 2003, the Fed was still in easing mode — it was, after all, the wake of the 2001 recession. The lesson for Greenspan’s heirs is that, while the broader economic trends can’t be ignored, actions (and inaction) can be framed strategically. Powell, whose Jackson Hole speech in 2018 was a paean to Greenspan, may already be pivoting. I can’t remember the last time a hiking cycle was curtain-raised in advance with such specificity. James Gorman, chairman and chief executive officer of Morgan Stanley, said Tuesday in Sydney that he met with Powell days before leaving for Australia. The Fed had planned to launch its tightening with a 50 basis-point hike, he said. “That was absolutely locked in and they won’t now,” Gorman told the Australian Financial Review Business Summit. “I’d be stunned if they do that because you can’t throw boldness on top of uncertainty.”Even if Powell is committed to fighting inflation, the feverish race among Wall Street firms to forecast ever more rate hikes can’t continue. “In this very sensitive time… it’s appropriate for us to be careful in the way we conduct policy because things are so uncertain and we don’t want to add to the uncertainty,” the Fed chief said. 

Powell also sounded wary of scorched-earth policies, should they be required, to get inflation back to the target of 2% over time. Republican Senator Richard Shelby of Alabama pressed the Fed boss on his commitment to that range, asking if price stability, one of the central bank’s mandates, meant “stable everything.” He answered in a roundabout way: “Really what it means is that people can go about their daily lives without thinking much about inflation. It comes down to that. And that it’s just not an important consideration for people living their lives, taking our mortgages, putting their kids through school, or for businesses that are borrowing, and things like that.”

Powell may be giving himself some wiggle room. The Fed is about to take the first meaningful step to tackle elevated inflation. Don’t automatically assume six hikes will follow. The rate-hike hysteria of January is looking a little careworn.More From Bloomberg Opinion: 

• Wartime Economy Freezes ECB’s Retreat from QE: Marcus Ashworth

• A Tale of Two Oil Shocks: Ukraine and Yom Kippur: John Authers

• Stagflation Is Already Here in the Housing Market: Conor Sen

(1) The National Bureau of Economic Research, the arbiter of the beginning and end of American business cycles, didn’t declare a recession began in July 1990 until April the following year.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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