Central Banks Will Be Forced to Pivot in 2023
Policy makers will shift to focusing on growth rather than inflation. Plus a selection of the writer’s favorite columns.
Maintaining liquidity may be a challenge in financial markets next year.
Photograph: Martin Bernetti/AFP via Getty Images
What to expect in 2023:
Policy makers will need to ease off on the brakes as evidence percolates through that the upsurge in inflation is waning and economic growth is slowing. The UK is already seemingly in a recession, along with much of Europe. The big question for 2023 is when or if the US craters too. There are plenty of warning signals. Probably the most important indicator for next year will be US labor data, replacing inflation statistics as the most market-moving number. If the US economy turns for the worse we may even see rate cuts before too long. Dare to dream of an end to the Federal Reserve’s rate-hiking cycle, as the rest of the world is desperate for it to stop. Even the last holdout on negative rates, the Bank of Japan, has had to bend.
Unfortunately, a new bugbear will hove into view: quantitative tightening. The Bank of England stopped reinvesting maturing bonds in March, but started in November to actively sell gilts back into the marketplace. The Fed has ramped up its passive QT to in excess of $1 trillion per year, and the European Central Bank will begin reducing its €5 trillion ($5.25 trillion) bond pile from March. How global liquidity will cope with everyone reducing monetary stimulus simultaneously will be a key issue for markets next year.
From the Year Behind Us:
Getting Back To the Right Side of Zero: After more than a decade of official interest rates being close, or even below, zero, 2022 was definitively the year the tide turned as inflation roared. After something of a false start, the Bank of England kicked rate hikes off in December 2021, but the Fed rapidly took the lead in tightening policy. Even the ECB finally said goodbye to eight years of sub-zero deposit rates this summer. The post financial crisis fixation with monetary stimulus, including quantitative easing, is consigned to history — for now, at least.