Central banks accept pain now, fear worse later

But the aggressiveness of now-underground monetary policy action also pushes central banks into new and risky territory. By tightening rapidly and simultaneously when growth in China and Europe is already slowing and supply chain pressures are easing, global central banks risk overreacting, some economists warn. They can plunge economies into recessions that are deeper than necessary to curb inflation, driving up unemployment significantly.

“The margin of error is now very small,” said Robin Brooks, chief economist at the Institute of International Finance. “A lot of it comes down to the trial and how much emphasis to put on the 1970s setting.”

In the 1970s, Fed policymakers raised interest rates in an attempt to control inflation, but backed off when the economy began to slow. That allowed inflation stay elevated for years, and when oil prices soared in 1979, they reached unsustainable levels. The Federal Reserve, under Paul A. Volcker, eventually raised rates to nearly 20 percent, and raised unemployment to more than 10 percent, in an effort to fight price increases.

That example weighs heavily on the minds of politicians today.

“We think that failing to restore price stability would mean a lot more pain down the road,” Powell said at his news conference on Wednesday, after the Fed hiked rates by three-quarters of a percentage point for the third time in a row. The Fed expects to raise borrowing costs to 4.4 percent next year in the fastest tightening campaign since the 1980s.






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