Global Economy: Long wait for rate cuts may be just beginning

The discouraging news is there may be more to this wait-and-see than a couple of months’ worth of data.

Looking for those interest-rate cuts markets once breathlessly anticipated is beginning to feel like sorting through cardboard boxes after moving house. What you seek is in there somewhere. Just one more container ought to do it.

Reductions that had been penciled for midyear — in some market wagers, earlier than that — have been regularly pushed back. It’s fair to wonder whether they will instead be a feature of 2025. New Zealand contemplated a further hike last week; the country was once expected to be among the first to offer relief and and should, by some reckoning, have done so by now given its languishing economy. South Korea, one of the first to move against inflation, will have to wait. Resilient price gains in India have likely postponed a decision.

Barely a week passes without a big Wall Street name pushing back their timetable. Goldman Sachs Group Inc economists are now projecting the Federal Reserve will ease in September, as opposed to July. The company’s chief executive officer takes a less nuanced view: David Solomon sees none this year. Inflation is proving stickier than anticipated in most economies and, with a few exceptions, growth has held up without cuts. (The European Central Bank is likely to break away from the pack, given officials have talked so often about trimming in June.)

The discouraging news is there may be more to this wait-and-see than a couple of months’ worth of data. Inflation has come down, though in many places the pace of price increases still exceeds central bank targets. Given the opprobrium heaped on them for being slow to tighten as inflation spiked in 2021 and early 2022, who can blame authorities for being cautious? Time and again, the experience of the 1970s — when high inflation became entrenched — is rolled out by hawks as a kind of morality play.

Did central banks make mistakes? During a session of the Asian Monetary Policy Forum on Friday, they were scolded for believing high inflation was consigned to the history books. They had too much faith in forward guidance and the implicit ability to accurately project the direction of economies, a former official told the conference in Singapore. Pledges that quantitative easing would be tapered before rates went up delayed a timely response. The consensus seemed to be that any scaling down this year will be minimal, almost tokenistic; conditions that would normally justify large cuts don’t exist.

This assessment is harsh. After all, between the subprime meltdown and the second year of the pandemic, inflation was the dog that didn’t bite. Then-Fed chief Janet Yellen, now Treasury Secretary, called it a “mystery.” Conservative pundits confidently predicted that waves of QE would lead to a debasement of the dollar. That didn’t happen. It’s understandable, given the period of too-low inflation, that officials would be reluctant to leap at the first twitches of rising prices. Central banks also had little experience dealing with Covid-era supply chain disruptions on a truly grand scale.

It’s fine, if frustrating for some investors, to hold off a little longer on easing. But beyond debate about whether a particular indicator arrives a basis point or two above expectations, might an underlying shift in the world economy be taking place? In a March paper for The Brookings Institution, Hassan Afrouzi, Marina Halac, Kenneth Rogoff and Pierre Yared warned of more frequent spikes in prices. Historical trends that constrained inflation and made the job of central banks less arduous are reversing.

The authors argue that a retreat in globalization, the strain on budgets from graying societies and political populism, higher defense spending and even the green transition will put upward pressure on rates. “We think that it’s quite likely that inflation comes down this time around,” Yared told a Brookings podcast last week. But “the chances of inflation going back up and experiencing the kind of spikes we saw is much more likely.”

A golden era of central banking may have passed, not that it always felt that way. The years when authorities pined for more inflation had their share of upheaval: The Asian financial crisis, the risk of deflation in the early 2000s, the deep recession unleashed by the failure of Lehman Brothers Holdings Inc, all the way through the dramatic — and contentious — expansion of central banking power during the worst of Covid.

Next time CPI in the US, Australia or Indonesia misses’ forecasts by a tenth of a percent, check your anxiety. Far more is at stake. Monetary bosses need to brace for a new — or return of the old — world. Treasure the rate cuts when they do come.

As for those moving boxes, I gathered the courage to sort through a few stragglers last year after my move from New York to Singapore in 2019. I stumbled across a smattering of business cards. The name on one?Haruhiko Kuroda, the Bank of Japan governor who took rates negative and embarked on a massive expansion of QE. Truly a blast from the past.

Credit: Bloomberg