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Opinion
Daniel Moss

So Much for the Great Unwind. Easy Money Isn’t So Easy to Quit.

This week was billed as show time for inflation hawks. But easy money isn’t ready for the archives just yet. 

What happened?

What happened?

Photographer: MARTIN BERNETTI/AFP

Almost two years into the pandemic and with the deepest economic trauma in almost a century behind them, central bankers are dismantling their emergency measures with trepidation. For all the heavy breathing about the Great Unwind, steps by officials to extricate themselves from ultra-easy money have been small. Quantitative easing and low — negative, in some cases — interest rates aren’t ready for the museum.  

There are powerful reasons why consequential monetary authorities are barely strolling to the exit. They are no longer quite so confident that inflation is a passing fad —  “transitory” in the Federal Reserve’s parlance. Nor do they appear completely sold on the idea that elevated price gains will be a lasting feature that needs to be tackled aggressively, starting now. Policy makers fret that labor markets have a ways to go before regaining pre-Covid-19 vigor. They also remember the biggest challenge just two years ago was dragging inflation up to respectable levels. An eye ought to be kept on slackening growth. China is a particular worry; Premier Li Keqiang warned this week of “downward pressure.”

First, the widely-anticipated tightening that didn’t get off the ground: In a shock decision, the Bank of England balked at the higher rates that some leading officials had been hinting at for months. The vote on the bank’s nine-member policy panel wasn’t even close at 7-to-2. The BOE looked hamstrung by competing concerns about escalating inflation and an erosion of the economic expansion. If the hawks couldn’t score in London, it calls into serious questions the past month’s dominant story line of central banks being pushed around by investors counting on early hikes. 

While brakes were tapped this week in a couple of economies, the steps were largely as anticipated and fairly modest in scope. The Reserve Bank of Australia disposed on Tuesday of one of its three crisis pillars, ceasing efforts to pin the yield on the three-year government bond near zero. This was the easiest to ditch; QE and a near-zero benchmark rate remain. Governor Philip Lowe threw shade at trader bets that rates will climb next year. The next day, the Fed began its long-awaited tapering of asset purchases as anticipated. Chair Jerome Powell didn’t outright dismiss forecasts that rate hikes would begin soon after purchases are completed, likely in June. He did go out of his way to stress patience and emphasized that the job scene could still use some repair.  

In another important divergence, European Central Bank President Christine Lagarde pushed back against the notion that euro zone interest rates are heading higher in 2022. “Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year,” she said Wednesday in Lisbon. The ECB says that while the current phase of faster inflation will last longer than previously projected, price pressures should still ease once global supply chains heal. 

The turn toward slightly tighter monetary policy is far from uniform and has major regional deviations. By the close of this year, about half the 31 central banks tracked by JPMorgan Chase & Co. will have lifted rates from their pandemic nadir. Global policy rates will end December around a third of a percentage point above their lows. The cautious path will likely continue: By the end of next year, the firm expects rates to move up further, but remain 71 basis points below their 2019 average. “The slow path of policy normalization is premised on the expectations that the U.S. Fed is not close to starting” rate increases, JPMorgan’s Bruce Kasman wrote in a note Wednesday. 

Ultra-easy policy is easy to commence but uncomfortable to extract yourself from. Because central banks have become big buyers of securities themselves and such big players in the bond market, communications can be fraught. The withdrawal needs to be ever so gradual and, in most instances, QE needs to be retired before benchmark rates are nudged up. That can make for long lead times, even as inflation gets off the floor. Raghuram Rajan, a professor at the University of Chicago and a former governor of the Reserve Bank of India, likened QE to a “whirlpool.” He told a conference organized by the South African Reserve Bank last month that the policy is “easy to get into, much harder to get out.” 

Perhaps it’s time to stop referring to asset purchases and microscopic rates as unconventional policy — or at least consider the ‘so-called’ modifier. Central banks are going to take a while to extricate themselves from the legacy of early 2020, let alone the era’s intellectual godfather, the global financial crisis of 2007-2009. This week was billed in advance as show time for the interest-rate hawks. Markets were supposed to be trampling over central banks. Did I miss it?