For central banks, the pandemic may have been the easy part. To buttress economies and markets during the early days of Covid-19, authorities pumped huge sums into the financial system. They could worry about the hangover later, or so the thinking went. And judging by the previous decade, stimulus-driven inflation was a nonissue. Nobody wanted to be accused of moving too slowly or doing too little — a critique that stalked policy makers in the years after the 2008 debacle.
Now an autopsy of the most recent bout of massive easing is in, courtesy of the Reserve Bank of Australia (RBA). It makes for tough reading.
The RBA is more used to accolades than scrutiny, given Australia’s long run without a recession before 2020. While there is a bit of defensiveness in this self-evaluation — things looked dire at the time, and so on — there is also a healthy dose of humility. The central bank tried to peg the yield on the three-year government bond around zero for too long, making the bank’s retreat from the policy look like it was caving to traders. “The target was met for the bulk of the period, but the exit in late 2021 was disorderly and associated with bond market volatility and some dislocation in the market,” the RBA wrote. “This experience caused some reputational damage.”
The report also noted that officials didn’t give sufficient public attention to the prospect of a swift economic rebound. The RBA’s guidance that conditions were unlikely to warrant a hike in the main interest rate until 2024 thus gets a working over. Rightly so, given it was late to begin hiking interest rates and has foreshadowed a rapid catch-up. Governor Philip Lowe said Tuesday that rates will probably rise by 25 to 50 basis points in July.
While nominally an assessment of the RBA’s efforts to control yields, the review functions as a draft postmortem on a period of considerable stimulus that included cutting the benchmark rate to near zero and quantitative easing. The yield experiment lasted from March 2020 to November last year. Lowe isn’t eager to repeat it. (QE is likely more palatable; a separate review is pending.) One thing that comes across is how hard it was for the RBA to extract itself from any single crisis response without the entire policy framework unraveling.
The bank claims to speak only for itself, but the document is a useful appraisal for a broader monetary experiment that stretched from North America to Europe and Asia. The scramble to recalibrate is being accompanied by a hunt for scapegoats for the galloping inflation that followed the speedy recovery. Former US. Treasury Secretary Larry Summers, once a contender to run the Federal Reserve, is unsparing in his criticism of the Fed under Chair Jerome Powell. “The return to humility, the abandonment of forward guidance as a policy tool is entirely appropriate,” Summers said in a speech. “It is likely to be necessary to make much more difficult choices than yet contemplated between acceptance of slack and acceptance of sustained, above-target inflation.”
It’s worth noting that the RBA considered so-called unconventional policy well before deaths rose, markets buckled and borders were closed. Lowe had previously flagged the possibility of bond purchases to drive up price increases. In his concern about too-low inflation, the governor was in good company. Janet Yellen, now US Treasury secretary, said when she was Fed chair that inflation’s failure to fire despite low unemployment and interest rates was a mystery.
Even with inflation spiking, it’s too soon to write off the use of pandemic tools in the future. QE was once considered exotic and useful only to perceived economic failures like Japan. It then became utterly mainstream. Same with near-zero interest rates.