The Tough Choices Facing the World’s Central Banks

Since the US Federal Reserve began jacking up interest rates in March 2022 to slow inflation, economists, policymakers and investors have been calculating and recalculating its chances of achieving a so-called soft landing — slowing the economy enough to rein in prices without triggering a sharp rise in unemployment. A year later, inflation was dropping but debates still raged over whether the Fed was likely to land safely or overshoot or undershoot the runway. Then new turbulence was added by the biggest banking crisis since 2008. While the bank failures were largely limited to the US, other central banks faced difficult choices on whether to continue, pause or reverse interest rate hikes.

Recession. It’s what many economists have forecast will happen as the Fed’s most aggressive credit tightening campaign since the 1980s takes an increasing toll on the US economy. If what’s needed to squeeze inflation is too extreme — or if the Fed makes a mistake — what’s been a persistently strong labor market could finally crack, leading unemployment to rise significantly and millions of workers to lose their jobs. It’s not what Fed Chair Jerome Powell wants to see — nor Joe Biden, who’s seeking another term as president in 2024.