adminOnce seen as the world’s go-to economic crisis fighters, central bankers are now desperately trying to contain a problem they allowed to happen: inflation.
That’s eroded their credibility in the eyes of investors and society at large.
Officials have offered mea culpas.
US Federal Reserve Chair Jerome Powell acknowledged in June that “with the benefit of hindsight, clearly we did” underestimate inflation.
Christine Lagarde, his counterpart at the European Central Bank, has made similar concessions, and Reserve Bank of Australia Governor Philip Lowe said in May that his team’s forecasts had been “embarrassing.” In October, South African Reserve Bank Governor Lesetja Kganyago warned at a monetary policy forum that it takes a long time for central bankers to build credibility—but that it can be lost abruptly.
Central banks’ independence is harder to justify after such a failure of “analysis, forecasts, action and communication,” Allianz SE’s chief economic adviser, Mohamed El-Erian, tweeted in October.
The tragic result, he says, is “the most front-loaded interest-rate cycle that we have seen in a very long time, and it didn’t need to be.”
The first step for the newly humbled monetary policymakers is getting prices back under control without creating economic havoc.
Next they must transform the way central banks operate. For some experts, that means three things: paring down their mission, simplifying their messaging and preserving flexibility.
“Do more by trying to do less” is how former Reserve Bank of India Governor Raghuram Rajan describes his advice to central bankers.
The Fed’s big miss on inflation has led Powell to start invoking the lessons of Paul Volcker, who famously tamed it in the 1980s. – Bloomberg
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