Although governments were lightning quick in imposing severe ‘COVID-Zero’ measures to protect people from a novel pathogen, their actions came with an enormous price tag valued in the trillions – but by contrast, central banks like the US Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) have been reluctant to deal with the far-reaching inflationary consequences.
It’s a geopolitical and economic challenge where every possible solution comes with its own set of risks – if central banks decide to hike rates to reduce inflation, then borrowers are stricken with higher repayments, potentially bringing the economy to a halt; but if they wait too much longer, they risk the economy overheating.
Financial experts agree that central banks have been sluggish in making the moves necessary to kink inflation and impede its economic havoc, like Franklin Templeton fixed income chief investment officer Sonal Desai and research analyst John Bellows.
Speaking to Franklin Templeton head Stephen Dover in the podcast Talking Markets, Ms Desai and Mr Bellows referred specifically to the Fed and its prolonged inaction on interest rates.
Last month, the Fed kicked off its tightening campaign after three years of downward movements, but economists believe the US central bank will have to do more to stem inflationary pressures.
Ms Desai believes the Fed’s recent hints of further and rapid interest rate rises, could help push the US inflation rate from the current 8 per cent to 5 and 7 per cent by the year’s end.
In fact, what the Fed is signaling is potential hikes in 50-basis point increments if it concludes that it is appropriate to move more aggressively.
But while Ms Desai is of the opinion that the Fed needs to play catch-up and reverse rising inflation in the United States, Mr Bellows expects growth to slow on its own, noting that less action is needed.
“We think growth is going to slow on its own, the income is a lot lower this year than it was last year on a nominal basis, it’s even lower on a real basis,” Mr Bellows explained.
“Traditionally, lower real disposable income is not a recipe for good growth, it’s a recipe for slowing growth, for a weaker consumer, for businesses that are a little more hesitant.
“Now if that’s right, then monetary policy may not need to do all that much to get growth to moderate, it’s going to moderate on its own,” Mr Bellows continued.
The problem - to hike or not to hike - extends beyond the borders of the US, with central banks across the world grappling with equally difficult decisions including the RBA.
Possibly the biggest stand-out is the Bank of England, which has led the way by incrementally hiking rates in recent months, but only after intense provocation from rising consumer prices and the surge in oil prices following Russia’s military invasion of Ukraine.
Back in Australia, the RBA has signaled a possible departure from its patient approach to rates, hinting earlier this week that rate lifts are on the cards in coming months.
Seemingly, the RBA is no longer confident that growth will contract on its own, as propagated by Mr Bellows.
The RBA, however, is waiting for the March quarter consumer price data, which many expect could shock the bank into action.
Inflation currently sits at 3.5 per cent in Australia, and while it’s not necessarily as alarmingly high as in the US, a slight rise may be enough to scare RBA governor Philip Lowe into abandoning his patient philosophy.
