All Together Now: ‘Tighter Policy Isn’t Tight Policy’

The issues Australia and South Korea wrestle with encapsulate a broader dilemma. Policy makers need to acknowledge that economies are returning to health, financial markets have broadly stabilized and inflation is picking up. Continuing without any sort of adjustment, however nuanced and gradual, isn’t credible. They also say that the rise in inflation is unlikely to be prolonged and that labor markets aren’t fully healed. It’s a delicate balance for the most deft of central bankers. The good news for Sydney and Seoul is that the fate of the world doesn’t sit squarely on their shoulders.

That responsibility falls to the Federal Reserve. Though some investors were startled that the Federal Open Market Committee projected two rate increases in 2023, senior officials have stressed their belief inflation will remain under control and jumps in prices won’t be sustained. The Fed is yet to unveil a timeline for retreating from asset purchases. A higher federal funds rate is something for the very long-term horizon. (I wouldn’t pay a lot of attention to the handful of Fed district bank presidents laying out scenarios in which rates rise next year. More important is that the top brass remains dovish.)

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