Irrespective of any spin or successful needle-threading from Jerome Powell, there’s a chance the Fed becomes a hawkish outlier going forward.
Not as defined by the actual policy stance viewed in a vacuum. Even an accelerated taper and faster hikes would leave policy very accommodative in 2022. But rather by the policy bent relative to the recent evolution of policy in other locales, and what the collision of that evolution with new risks likely entails for policy going forward.
The ECB is nowhere near raising rates and has two QE programs to unwind. It seems increasingly unlikely that PEPP will be terminated entirely — it’ll probably be rebranded, kept in reserve or perhaps folded into “regular” QE somehow, with “flexible” exceptions carved out for the periphery in order to keep spreads within an acceptable range. And that’s assuming it’s not extended in its current form to account for any new “downside risks” that materialize over the next several months.
The BOE fumbled an opportunity to hike at the November meeting. You could, I suppose, argue the bank’s “shock” decision to remain on hold last month looks prescient in light of the Omicron variant, but you could just as easily say the window is now shut considering dour projections about the trajectory of UK caseloads as the strain spreads.
Paradoxically (considering the extent to which central bank critics made Haruhiko Kuroda the cartoonish poster child for monetary extravagance), the BoJ is actually quite savvy. The financial media finally picked up on the genius embedded in the bank’s asset purchase programs: They’re flexible and they evolve. The BoJ has already tapered. And they were tapering prior to the pandemic. There’s a perception among market participants that Kuroda is always on hold — that he’s stuck in monetary Neverland in perpetuity (to employ an allusion to Kuroda’s famous Peter Pan reference). In fact, BoJ policy is pretty agile and in some respects, at least, it’s less ham-handed than Fed and ECB accommodation. Practice makes perfect, after all.
Meanwhile, Norway has already hiked, as has New Zealand. Canada pivoted decidedly hawkish in October, while Australia abandoned YCC and seems determined to avoid raising rates irrespective of market pricing (at times, Philip Lowe’s push back on the market-implied timeline borders on the vindictive).
Finally, China is embarking on an easing cycle, even if the PBoC won’t say that explicitly. RRR was cut last week and even as MLF rates were kept unchanged Wednesday, an article in the Securities Times suggested a cut may be in the offing, which would set the stage for the first reduction in the loan prime rates in nearly two years.
All of that to say that central banks around the world (the ones that “count” anyway) have either i) already tightened, ii) missed the boat, iii) decided to remain on hold pending additional information, iv) started easing (in China’s case) or some combination of i) and iii).
That leaves the Fed as the sole monetary authority begrudgingly committed to “active hawkishness” (if you will) for the foreseeable future.
The irony, of course, is that “foreseeable future” always ends up being a misnomer in this context. The Fed as a hawkish outlier isn’t a viable state of affairs.
Sooner or later (usually sooner) it manifests in cross-asset turmoil, starting on the “fringes” (e.g., in emerging market FX) and working its way inward until the only thing bid is the dollar.
