Central bankers in the developed world are not yet planning any vigorous fight against inflation. They fear that, in the still fragile economic situation, they will not slow down the promising economic recovery again. Therefore, they usually neither raise interest rates nor restrict large-scale purchases of securities. The “printing” of new money continues as if it hadn’t frosted.
The central banks in the West have “doves” on top, which favor a loose monetary policy. They often argue that the rise in prices will be only temporary in times of economic recovery after the pandemic and concerns a limited number of items.
The “hawks” blame them for underestimating the threat of inflation and only delaying the moment they step on the brakes. According to proponents of tighter monetary policy, this may be too late – then it will be necessary to brake really hard.
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Fed chief Jerome Powell has been facing a “barbecue” in Congress in recent weeks. Critics of the dominant pigeon policy are heard in Britain or Poland, whose loose monetary policy is in direct contrast to the gradual tightening of screws in the Czech Republic or Hungary.
Conflicts of opinion do not escape the euro area either, which, on the contrary, has had a problem with too low inflation in the last decade. The European Central Bank (ECB) announced last week that it intends to allow inflation higher than two percent in the future for some time, but German, Dutch and Belgian bankers are much more reluctant to tolerate higher prices than ECB President Christine, according to the Financial Times. Lagarde.
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Without an ideal recipe
In fact, no one can claim to have the perfect recipe at hand. No one has ever prescribed it, because the current situation is unprecedented. The Covid crisis was very different from the previous ones – both by the gradual closure of entire sectors in various parts of the world and by the huge pumping of money directly into the economy, in which governments and central banks were involved.
In the past financial crisis, much of the money printed remained “unloaded” into the real economy as vulnerable commercial banks improved their balance sheets. This suggests that the risk of high inflation is now much higher.
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But central bankers are realizing how uncertain the future outlook for the economy is. The coronavirus delta mutation may turn up well. At the same time, individual countries are gradually ending stimulus measures. Crystal ball divination is reminiscent of predictions of how businesses and households will be willing to spend.
High inflation poses a great danger, perhaps more likely, than the economy slipping into recession again, but it is an even more serious threat. Central banks cannot ignore this.
There are many indications that higher inflation is indeed a temporary issue, according to Jerome Powell and other central bankers. Statistically, year-on-year prices are rising more because they were low last year. However, other factors increase inflation. People started spending more on reopened services. Problems in supply chains have a significant impact – lack of raw materials, building materials and various components for production, including chips.
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Even in this case, optimists hope that this is a temporary matter, but it is not certain. First, the resumption of trade ties following their disruption as a result of a pandemic can take a long time, and second, new risk factors are emerging. The announced transition to a “greener” economy, renewable energy sources or electromobility will require an increased supply of new components and raw materials, including lithium, copper, cobalt or rare earth elements. This means considerable demands on mining and processing capacity, which are not enough to satisfy even the current demand.
Humbuk in the USA
Much will depend on how inflation expectations develop, which may become a self-fulfilling prophecy. Investors in capital markets may trust central bankers that higher inflation is only temporary, but many companies and people may see it differently.
The British Chamber of Commerce has reported the biggest inflation concerns among members over the past decade. Wrinkles at the forefront of monetary policy makers are attributed to a shortage of skilled labor, which can push up wages and, consequently, prices. They also have problems getting the necessary employees in the United States today. Perhaps the situation may improve after the “covid” increase in unemployment benefits expires in September.
Fed Chairman Powell emphasizes that price developments are now historically unique. The central bank intends to monitor whether the significant rise in prices will not affect a wider range of goods and services, which would signal the need to tighten monetary policy. However, the Fed found itself in a much more delicate situation than other central banks – not to mention the domestic CNB.
Merely expressing the Fed’s willingness to limit quantitative easing – that is, buying securities – can provoke major movements in financial markets and affect the entire world economy. U.S. economists use the term “taper tantrum” to describe the phenomenon – the danger of unnecessary “hype” about “narrowing” the purchases of the Fed’s central bank. The term taper tantrum is linked to the historical experience of 2013, when the Fed’s announcement that it would “narrow” quantitative easing caused panic and the rise in price of US debt.
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In the eyes of many American Republicans, the Fed has become complicit in irresponsible government policy. Washington, under President Joe Biden, is making trillions of dollars more financial injections into the economy, and the Fed is helping the government continue the spending. For example, Lawrence Summers, a former finance minister under President Bill Clinton, has become a strong critic of the Biden administration. He, too, believes that spending could ultimately halt the economic recovery.
Tightening US monetary policy, on the other hand, would be a major complication for poorer countries in the emerging markets group – emerging markets outside North America and Western Europe, including investors in the Czechia. As the dollar strengthens, their currencies come under more pressure, imports become more expensive and prices rise all the faster. Central bankers from these countries are usually unable to afford such delays in the fight against inflation as the United States or the United Kingdom, and rely on it to be a temporary phenomenon.
What are they for?
The traditional dove-hawk fight between central bankers has entered another act, but is now taking on much broader proportions. The basic question returns, what is the purpose of monetary policy. Central banks are taking on new roles and using new tools.
From the 1980s until the financial crisis around 2008, there was more or less a consensus that the task of central banks was to strive for a certain ideal level of inflation and to set interest rates accordingly. Subsequently, a policy of buying securities was introduced, which was initially intended to prevent panic on the capital markets, later to face a recession, to save endangered commercial banks or the entire monetary union – as in the case of the euro area.
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According to critics, it is incomprehensible why massive purchases of securities continue to this day. Spanish economist Ángel Ubide, on the other hand, is one of those who cheer. Commenting on El País, he expressed satisfaction that central banks were no longer so rigid, could use more tools and played a key role in fighting a pandemic and kick-starting economic growth.
The question remains as to how far the expansion of the powers and objectives of central banks can go. According to the latest ideas, they are supposed to pursue a green policy in the eurozone and in the United Kingdom, and in America there is a call for the Fed to help face social and racial inequalities. It doesn’t bode well. Under pressure from the outside world, central banks become entangled in a sphere of influence that naturally belongs to governments.
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