The Inflation Fight Could Easily Go Too Far
Raising rates isn’t a silver bullet and could risk new headaches. Central banks may wind up with a different kind of credibility crisis on their hands.
Don't get too comfy in that chair.
Photographer: Matt McClain/The Washington PostA few months ago, central bankers were on top of the world. It looked like they had pandemic-era monetary policy all figured out. Now formerly confident calls that elevated inflation is a temporary phenomenon are fading to the background, just as the global economy’s strong start to the year is waning.
To curb a rapid rise in prices, the Bank of England is likely to lift borrowing costs as soon as December, a notion once considered far-fetched. The European Central Bank is having trouble convincing investors it will stay true to a pledge to keep rates low. Federal Reserve Chair Jerome Powell probably regrets having ever used the word “transitory,” which he once deployed liberally but now uses sparingly. Powell, whose term ends in February, is also beset by a trading scandal at district Fed banks and attacks on his bank-regulation record. What looked like an easy path to renomination — almost a coronation — has become tougher.
To listen to some of the clamor, you might conclude that raising interest rates as soon as possible would solve the problem. Such a step would be fraught, though, and risks shredding credibility as much as salvaging it.