In the 'Yes, But' Recovery, Conviction Is a Curse

(Bloomberg Opinion) -- Rarely have central bankers sounded less enthusiastic about a robust rebound. Economic growth is the best in decades and inflation is back, after years of worrying it would disappear. The reluctance to embrace what normally would be considered unambiguously good news shows that officials are still prisoners of the pandemic. 

In this “yes, but” recovery, it will pay to be nimble. The virus isn't defeated: The delta variant has eroded the pace of growth in key parts of the world and is simultaneously exacerbating bottlenecks, which are pushing up prices. China, usually a bulwark against an unsteady performance in Western commercial powers, looks vulnerable. Sure, the global economy will grow 6% this year, but that bounty isn’t spread evenly. Inflation, an afterthought when massive stimulus was launched in early 2020, is starting to look more troublesome than transitory. 

The hesitancy in embracing progress was on display last week at a panel organized by the European Central Bank. The heads of the ECB, Federal Reserve, Bank of Japan and Bank of England spent as much time discussing problems as acknowledging what was going right. “We are back from the brink, but not completely out of the woods,” said Christine Lagarde, president of the ECB. You could hear the fatigue and frustration in Fed Chair Jerome Powell’s remarks and the quiet resignation in BOJ Governor Haruhiko Kuroda’s comments. BOE Governor Andrew Bailey, wrestling with a fuel shortage and surging electricity prices, may raise interest rates as many as three times next year, according to traders. 

The biggest factor in determining the course of monetary policy over the coming year is the thing policy makers can least control: the path of the coronavirus and its mutations. Among the big dangers listed during the panel are potential new variants that are are vaccine-resistant. They were defensive about their oft-repeated predictions that the jump in inflation would be short-lived. “For some time, we and others have been forecasting that the current inflation spike will not lead to a new inflation regime in which inflation remains high year after year,” Powell said. “The current inflation spike is really a consequence of supply constraints meeting very strong demand, and that is all associated with the reopening of the economy — which is a process that will have a beginning, a middle and an end.”

Monetary policy was once fairly easy to predict. That, too, is now a casualty of the “yes, but” world. The Reserve Bank of New Zealand shocked investors in August by shelving a planned rate hike at the last minute because of a single Covid case. This week, it gets the opportunity for a do-over. But while many economists project an increase before too long, a move Wednesday is no sure thing. Bloomberg economist James McIntyre predicts no change. The Reserve Bank of Australia, which announces rates a day earlier, has been hard to call recently. The RBA has defied widespread predictions it would recant its tapering plans. The Reserve Bank of India, whose officials meet Friday, is signaling a scaling back of accommodation.

Don’t be misled by the People’s Bank of China’s criticism of quantitative easing by big Western central banks. Tightening is probably the last thing on officials’ minds as Beijing grapples with the prospective collapse of China Evergrande Group, which is buckling under more than $300 billion in liabilities. The central bank has been busy injecting liquidity into the financial system. Speculation is also building that the PBOC may deliver another cut in the reserve requirement ratio for banks to prop up the economy and maintain ample cash in the system. 

Central bankers are caught in an unenviable position of navigating this recovery with muted heroics. It's enough to make you nostalgic for the era when too-low inflation was, in the words of then Fed Chair Janet Yellen, the big mystery of our time.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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