During the covid crash last year we saw central banks around the world ease policy like never before. Rate cuts, asset purchases, and more – everything was on the table.
By the end of 2020, this is what a chart of central bank interest rates and inflation looked like…
And this what it looks like today…
What changed? Everything.
The dire predictions of “deflation” and “depression” were all wrong, and instead we’ve seen the highest growth and inflation rates in decades.
This left central banks universally behind the curve, for while they immediately responded to prospect of deflation in 2020, they were very slow to acknowledge the growing threat of inflation in 2021.
But one by one, they are coming around to the idea that the ultra-easy policies implemented in 2020 are not only out of touch with reality, but are adding to the threat of persistent inflation:
- In March, Russia and Mexico started hiking.
- In May, Iceland started hiking.
- In June, the Czech Republic and Hungary started hiking.
- In July, Chile started hiking.
- In August, South Korea and Peru started hiking.
- In September, Colombia and Norway started hiking.
- In October, Poland, New Zealand, and Romania started hiking.
This great normalization of monetary policy has only just begun, for the US Federal Reserve and many other central banks (Bank of England, Bank of Canada, ECB, etc.) continue to maintain the easiest monetary policy in history.
Why haven’t they started moving back to normal?
1) They continue to dismiss higher inflation as transitory and therefore not requiring a policy response.
2) They continue to portray 0% interest rates and easy money as only positive with no possible negative consequences.
And why are we still buying these arguments? As I wrote earlier this year, Americans had never been more united on the belief that there was no downside to additional fiscal/monetary stimulus; as a result, inflationary pressures would have to continue to build before it was viewed as a problem.
That’s just now starting to happen. With each passing month, more and more people are talking about rising prices at the supermarket, at the gas pump, and everywhere else. And in consumer surveys, they are expecting it to continue for a while.
While they’ve yet to connect this pernicious inflation with an unjustifiably easy Fed, that day may be coming sooner than you think. And that’s a good thing, because there are downsides to everything, including an excess of easy money. The sooner we acknowledge that, the better off we’ll be. The road back to normal awaits. Let’s get on it before it’s too late.
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