The whatever-it-takes mutation: A race to raise rates that puts the economy on the brink

Monetary policy has turned 180 degrees in a matter of months. After years of calm in which inflation was thought to be dead in advanced countries, price increases have re-emerged in spades. The central bank was forced to dramatically change the meaning of its promises, from a promise that it would do whatever it took to cause inflation to a promise that it would do whatever it took to destroy inflation. The mythical whatever is needed delivered by Mario Draghi (former ECB President) he promised to do whatever was necessary to prevent the 2011 debt crisis from ending the euro. Now those same words have mutated and have a very different mission: to convince markets that central banking will beat inflation.

Mario Draghi noted before and after in European monetary policy on July 26, 2012 in the midst of the European sovereign debt crisis. The Italian banker said: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, that will be enough” (The ECB is ready to do whatever it takes to protect the euro. And believe me, that will be enough). This phrase, along with subsequent actions, it meant the end of the euro crisis. Later, central bankers would use similar expressions (with less success) to try to bring back inflation and stir up price expectations.

However, the final mutation of whatever is needed This year came and it was total. Few would bet that in 2022, central bankers will be desperately using the same tactics to try to control skyrocketing prices.

Changes at all levels

Bankers have gone from cutting interest rates to negative levels to raising them in a hurry, in a race to see who can make money more expensive without causing a crash in the economy; to increase the balance sheet and liquidity, to start the plans for quantitative tightening and draining reserves from the banking system; from seeking policies to devalue their currencies to worrying about their weakness, especially against the dollar; and from seeking policies that stimulate growth to recommending others that cool demand and consumption. Although there are many changes, in reality it all boils down to raising interest rates, reducing central bank balance sheets and convincing agents that inflation can be controlled through the new whatever is needed (Language is also a tool of the central bank.)

The latest editorial published by the investment bank BNP Paribas focuses precisely on the mutation of this whatever is neededa product of the complete change in monetary policy in advanced countries.

The experts of the French bank explain that the symposium in Jackson Hole and the latest decision of the ECB have confirmed this change. During this meeting of central bankers, both ECB and Fed officials “gave new meaning to whatever is needed. Given the uncertainty about continued high inflation, the Federal Reserve and ECB will raise interest rates further to control inflation, whatever the short-term cost to the economy, because not doing enough now would mean even more economic in future”.

“By insisting on the unconditional nature of monetary tightening, the Fed is signaling that price stability (returning inflation to target) is now more important than its other long-term goals, such as promoting maximum employment and moderate prices.” long-term interest rates The reason is, that if not enough is done to bring inflation back under control in the short term, this would have a negative impact on long-term growth and lead to bond yields rising due to higher expectations Isabelle Schnabel, a member of the ECB’s executive board also emphasized these points in Jackson Hole, adding that risks of deflation of inflation expectations are growing”explain the experts from BNP Paribas.

create a recession

The situation is such that the central bank is not only throwing out grandiose and shocking phrases to try to curb inflationary expectations. The “masters of money” are forced to do so forces a recession to try to control inflation and prevent the generation of a spiral between prices and wages.

ING agrees, explaining in a report that “most central bankers are obsessed with addressing the biggest inflationary threat since the 1980s… Unable to influence the supply side of the economy, central bankers are now very focused on slowing demand with tight monetary policy. Recessions will be seen as the lesser of two evils,” said economists from the Dutch bank.

The problem is that these policies lead economies into a painful recession, which in turn generates great uncertainty and therefore strengthens the dollar, an asset that works as a safe haven, benefiting from turbulence in markets and the economy. “As the dollar hits its highest levels in more than twenty years, some are starting to struggleRemember the 1985 Plaza Accord, a G-5 agreement to reverse the dollar’s strength. To take effect today, such an agreement would require the Fed to begin easing monetary policy. And such a turnaround looks highly unlikely this year,” ING economists say.

This leaves only one option for the ECB and other non-US central banks. If they want their currencies to stop sinking against the dollar, they will have to keep raising interest rates in a relentless race. Compared to past decades, the goal now is to prevent depreciation against the dollar, the currency in which commodities and much of international trade is denominated. A weak currency today is synonymous with more inflation. So in the short term, both the ECB and most other central banks have only one option: try to follow in the Federal Reserve’s footsteps without fooling around.

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