It seems 2023 is arriving early. The race to raise interest rates to levels that have a hope of quelling inflation is entering a less punishing phase. It may be only a slight stretch to say the end of the most rapid monetary tightening in at least a generation is coming into view. Here’s hoping the troubled world recovery still has a pulse by the time central banks down tools.
One consequence of tapping the brakes more gently is that the pause penciled in for next year could take longer to materialize. The delay might be a matter of months. I’ll take it. The global economy has slowed significantly; European Central Bank President Christine Lagarde warned Thursday of the “higher likelihood of a recession” and signaled a less hawkish approach is in the works. Investors took the cue and further pushed down global bond yields.
The blistering series of hikes by the Federal Reserve has led to a dollar surge that’s created great strain in financial markets. Anything that reminds us that 75 basis-point increases aren’t normal is welcome. The Fed is likely to ratchet up its main rate by another three-quarters of a percentage point Wednesday, the fourth consecutive move of that magnitude, and then scale down to smaller increments before wrapping up next year. The dollar has begun to cautiously retreat from giddy heights; a gauge of the greenback’s strength has pulled back from a record. Still dominant, for sure, but not quite so rampant.
Having rushed to get borrowing costs to a point where they constrain the economy, policymakers around the world are beginning to look for an off-ramp. They aren’t ready to stop hiking, let’s be clear — it’s just no longer crazy to speculate that the really big moves are behind us. And it’s important to remember that climbs of more than 25 basis points, let alone multiples of that, are unusual in the past few decades. Monetary policy, as more officials are likely to remind us, works with lags. The frenetic activity of 2022 needs to wash through the system. For that, central banks need time.
Central banks are clearly approaching some kind of turn. What might have been regarded as isolated signals are getting harder to ignore. The Reserve Bank of Australia surprised by hiking only a quarter point this month and the Monetary Authority of Singapore tightened modestly relative to some forecasts. Then, on Wednesday, the Bank of Canada pushed its main rate higher by just half a percentage point rather than the anticipated three-quarter step. Tiff Macklem, governor of the Bank of Canada, went further in his press conference: “This tightening phase will draw to a close. We are getting closer, but we aren’t there yet.”
It’s the “getting closer” that’s key to understanding this moment, rather than the qualifier. Macklem said what few might dare to express so explicitly, with the exception of his Tokyo counterpart, Haruhiko Kuroda, who each month finds new ways to emphasize that he’s not even contemplating a step away from negative territory. You see one exercise of restraint in, say, Sydney and you can dismiss it. It happens again in Singapore and you can explain it away as an idiosyncrasy of the city-state, which uses a complicated exchange-rate formula to tune the economy. On the third occasion, it’s much harder to avoid a broader point. The world has a friend in Canada.
We should ask whether the word “pivot” has been misused, or gotten in the way of a subtle but important debate. Investors have been looking for signs of a shift for months, only to be met with a wall of indignation. Central bank X says it isn’t close to being done, would be the retort. Look, the minutes of Y say more hikes are coming. Governor Z gave no sign in the press conference that inflation is remotely acceptable.
All fair points, but something might have been lost in translation. The two sides were talking past each other. A pause or, less likely, cuts, don’t have to be in the near-distance for monetary policy to undergo a recalibration. Something different is happening after months of what felt like near-robotic big increases. “We are well down the path of where we need to be,” Adrian Orr, governor of the Reserve Bank of New Zealand, one of the most aggressive price busters, told a conference on Thursday.
Pivot or recalibration? It may all just be a question of semantics.
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