One consequence of stepping on the brakes more gently is that the break planned for next year could take longer to materialize. The delay could be a matter of months. I’ll take it. The global economy has slowed considerably; European Central Bank President Christine Lagarde on Thursday warned of the “higher likelihood of a recession” and signaled that a less hawkish approach was in the works. Investors followed suit and pushed global bond yields further lower.
The Federal Reserve’s meteoric series of hikes led to a soaring dollar that created severe tensions in financial markets. Anything that reminds us that increases of 75 basis points are not normal is welcome. The Fed is expected to raise its key rate an additional three-quarters of a percentage point on Wednesday, the fourth consecutive move of this magnitude, and then cut it in smaller increments before wrapping up next year. The dollar began to retreat cautiously from dizzying heights; a gauge of the greenback’s strength fell by a record high. Still dominant, of course, but not as prevalent.
Having rushed to drive borrowing costs to the point where they constrain the economy, policymakers around the world are beginning to look for an exit ramp. They’re not ready to stop the ride, let’s be clear – it’s just not crazy anymore to speculate that the really big moves are behind us. And it’s important to remember that hikes of more than 25 basis points, let alone multiples of that, are unusual in recent decades. Monetary policy, as other officials are likely to remind us, works with lags. The frenetic activity of 2022 must flow through the system. For this, central banks need time.
Central banks are clearly approaching some kind of turning point. What might have been considered isolated signals are becoming increasingly difficult to ignore. The Reserve Bank of Australia surprised by rising only a quarter of a point this month and the Monetary Authority of Singapore was slightly tighter than some forecasts. Then, on Wednesday, the Bank of Canada raised its key interest rate by just half a percentage point instead of the anticipated three-quarter hike. Tiff Macklem, Governor of the Bank of Canada, went further in his press conference: “This phase of tightening is coming to an end. We are getting closer, but we are not there yet.
It’s the “closeness” that is the key to understanding this moment, rather than the qualifier. Macklem said what few could dare to express so explicitly, except for his Tokyo counterpart, Haruhiko Kuroda, who every month finds new ways to emphasize that he is not even considering walking away. negative territory. You see a restraint exercise in, say, Sydney and you can reject it. This is replicated in Singapore and you can explain it as an idiosyncrasy of the city-state, which uses a complicated exchange rate formula to regulate the economy. On the third occasion, it is much more difficult to avoid a wider point. The world has a friend in Canada.
We should ask ourselves if the word “pivot” has been misused or intruded into a subtle but important debate. Investors have searched for signs of change for months, only to be met with a wall of outrage. Central bank X says it’s not about to be done, would be the retort. Listen, Y minutes say more hikes are coming. Governor Z gave no sign at the press conference that inflation is within acceptable range.
All good points, but something may have been lost in translation. The two parties were talking to each other. A pause or, less likely, cuts need not be close at hand for monetary policy to undergo recalibration. Something different is happening after months of what looked like big, almost robotic increases. “We are well on the way to 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 just be a matter of semantics.
• Singapore’s global growth warning must be read: Daniel Moss
• The BOE is the central bank’s crash test dummy: Marcus Ashworth
• Consumers shocked by stickers are nearing breaking point: Jonathan Levin
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.
More stories like this are available at bloomberg.com/opinion