Central banks, after blowing the inflation call, piled into rate hikes to save their credibility but neglected to assess the lag effects along the way and now some of these are blowing up in everybody’s face. Well done. Again.
The worst part in all this is that the lag effects are still filtering through and hence things will obviously still get worse on the growth front. But recessions happen fast once confidence is lost and confidence just took a crowbar to the face.
How will they restore confidence? I think this is the key question the Fed and ECB must be asking themselves right now. Do you want to risk blowing everything up to save face and lose even more face in the process?
Or do you do what’s right from a policy perspective, admit that you got blindsided (again) and try to do what’s necessary to keep things from blowing up and causing another major crisis and an immediate large scale recession?
From my perch they need to let go of their self perceived credibility issues and do what’s right. Before throwing more gasoline on the fire perhaps stop. Immediately and figure out the status of the blaze.
That means stop rate hikes and pause QT and backstop liquidity. Worry about inflation later. Inflation is already coming down and the events of the past week into today are likely to kill it off anyways.
A recession will do that, every time. But you can’t risk a systemic event which is front and center right now and nothing is more of a systemic risk then the financial sector freezing up.
Moodys downgraded the entire US banking sector to negative yesterday. This is not an environment to raise rates into. Even Volcker knew that and not only did he stop raising rates he cut them.
But Powell is no Volcker. Volcker was good at central banking and as the evidence over the years keeps mounting that Powell is not. Blunder after blunder. Creating fires and then chasing them. Sad.
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