Does Legoland Foretell the Great Rate Pivot?

After a monetary-policy year for the ages, 2023 will bring no shortage of challenges. The overwhelming priority of reining in prices will give way to a more nuanced and no less perilous task: Rescuing the sputtering global recovery without being seen to throw in the towel on inflation.

While central bankers around the world are loath to acknowledge it, interest-rate cuts may be on the docket. They want to convey that the inflation battle isn’t over. The specter of the 1970s, when policy switched prematurely to fostering growth and allowed price increases to become entrenched, is frequently invoked. But there is a distinction between inflation that’s high and starting to come down — in an environment where the expansion is struggling — and inflation that marches inexorably higher. That’s the window that will open next year. “We will stay the course until the job is done,” Federal Reserve Chair Jerome Powell, said Wednesday. Markets are skeptical. At the very least, rates are off autopilot.