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Banking & finance
CommentUnited States
David Brown
David Brown

Macroscope | High interest rates will not become the new normal in 2023

  • Interest rates may be up from their very low position a year ago, but that does not signal a permanent tightening of monetary policy
  • Central banks know better than to sacrifice growth when inflation levels are already settling down

Reading Time:3 minutes
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Federal Reserve chairman Jerome Powell attends a news conference at the Federal Reserve Building in Washington on December 14, 2022. Photo: Reuters
David Brown
Are we heading into a new central bank regime for tougher monetary policy? After 40 years of falling inflation, interest rates and bond yields, it’s very unlikely that global monetary policymakers are about to change their spots. Sure, we have an inflation crisis on our hands, but it’s just a blip, a transient shock that will pass as global energy prices continue to fall and the world adjusts to the cost-of-living crisis.
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We are not in a global wage-price inflation spiral and all we are seeing is a normalisation of interest rates and a fluke opportunity for central banks to regain control of the yield curve and borrowing costs.

There are too many ghosts in the machine to tolerate overkill on interest rates, not least the legacy of the 2008 financial crisis, the 2010-12 European debt crisis, the 2020 pandemic and the 2022 energy price shock.

Central banks have been in crisis management mode for too long to change direction any time soon. There will be no return to the monetarist extremism of the 1980s as the present generation of central bankers in major economies lack the appetite for anything other than a gradual, managed recovery.

Stronger growth is still the priority over inflation risks. Inflation hawks are simply bluffing and wrong. The signs are that inflation risks are already receding, wage inflation seems reasonably muted and the need for higher interest rates is over.

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Indeed, the odds are the US Federal Reserve is already close to the top in its tightening cycle and that US interest rates should be on their way down again by the end of 2023 as the need for faster recovery takes over.

Of course, it was a different matter in the high-inflation period of the late 1970s and 1980s when oil price shocks and hyperinflation were undermining global growth and monetarist zeal was ruling the roost in central bank thinking. With US inflation running to a peak of close to 15 per cent in early 1980, the Fed’s monetary response was merciless, driving the benchmark Fed funds rate to a high of 20 per cent by January 1981.

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