Central banks that launched massive emergency support to fight the pandemic last year are now planning a global turn in the other direction, with gaps already emerging in their perceived risk of inflation, the need to respond to it, and the pace of the likely return to normal monetary policy.
They are confronted with common supply shocks and common risks around a pandemic that continues to shape commerce.
“Globally we are still in for a long process,” of reopening and adapting to the post-pandemic economy, St. Louis Federal Reserve President James Bullard said this week in a Reuters interview.
But the reopening, and particularly the associated inflation, is being felt differently across the developed world, testing officials’ understanding of the post-pandemic economy and their ability to hit a shared 2 percent inflation target without derailing global growth.
The heads of the world’s four major central banks gather for a mostly virtual European Central Bank forum, and if last year was marked by a uniform rush to stave off the worst, their exit strategies are already diverging.
That’s led to major policy scuffling both in Europe and the United States over how much inflation risk central banks should tolerate as they try to make up for sluggish prices in the years since the Great Recession a decade ago – a major gamble, in effect, over whether the post-pandemic world will work the same as before.
Policy divergence among the world’s major central banks can influence markets worldwide, shifting capital flows, exchange rates and trade patterns. There may even be limits on how far a central bank like the Fed might go in normalizing policy or raising interest rates if major partners like the ECB aren’t moving in the same direction. – Reuters
