The US Federal Reserve is moving decisively away from ultra-aggressive tightening policy into a wait-and-watch mode, with the latest language from the policymakers suggesting a clear caution in their tone.
From behind the curve in 2021, when the Fed called the surge in inflation as ‘transitory’ to ‘more rate hikes needed’ as recent as last month, the journey of the US central bank mirrors the global policy path over the last two years.
With inflation showing clear signs of easing, the Fed looks to take its pedal off the accelerator.
History, perception & expectations
Historically, a rate-hike cycle follows a short pause in the policy path before interest rates are cut.
But, this is where experts are divided.
While one section of economists and analysts expect policy to stay on hold until the second half of next year, an equal number of them predict the central bank will bring its knife out in the April-June quarter.
The reason for the divide is inflation expectations.
Easing inflation calls for a pause in rate hikes, but the triggers of elevated price pressures over the past year are still at play.
Geopolitics-driven disruption to global supply chains, rising cost of living and no signs of international crude prices cooling anytime soon.
So, with the recipe for inflation surge still intact, the question of central banks ‘behind the curve’ narrative gains traction.
Damned if they do, damned if they don’t
Global central banks have had a tough balancing act over the past two years – managing surging price pressures and slowing economic activity simultaneously.
While what they have done is commendable at a time when external factors, including the Russia-Ukraine war, influenced policy decisions, the real question is: Are central banks responding after the events rather than being proactive?
Broadly – the expectations now point to an end to rate-hike cycles, with most major central banks predicted to move into a pause mode.
Bets are also piling up for rate cuts in 2024, but the hesitation and uncertainty reflect past mistakes.
Will the beginning of 2024 be a decisive moment to welcome a shift in policy path, or will we have more of the same?
Households would hope central bank policies support their purses, and businesses would want their borrowing costs lowered.
The next phase of the monetary cycle is filled with the same sentiment – dilemma.
