Ambrose Evans Ambrose-Pritchard writes in The Telegraph that “monetary tightening is like pulling a brick across a rough table with a piece of elastic.
“Central banks tug and tug: nothing happens. They tug again: the brick leaps off the surface into their faces.”
Or as economist Paul Krugman puts it, the task is like trying to operate complex machinery in a dark room wearing thick mittens.
Lag times, blunt tools, and bad data all make it impossible to execute a beautiful soft-landing.
Way back in late 2007, the economy went into recession, a lot earlier than originally thought and almost a year before the demise of not-too-big-to-fail Lehman Brothers.
But the Federal Reserve apparently didn’t know – or acknowledge – that at the time.
The initial data release was way off base, as it frequently is at certain points in the business cycle.
The Fed’s main predictive model was showing an 8% risk of recession at the time. Today, by the way, it’s under 5%. Evans-Pritchard remarks, “It never catches recessions and is beyond useless.”
Fed officials later complained they wouldn’t have taken their hawkish stance on inflation the next year had the data told them what was accurately happening in real time.
And, more importantly, they wouldn’t have set off the chain reaction leading the global financial system to come crashing down.
Evans-Pritchard, however, ponders that had the Fed and its peers overseas paid more attention – or any attention for that matter – to the quickly evolving slowdown in the first half of 2008, they would have seen what was coming.
So, where does that leave us today as the Fed, European Central Bank and Bank of England hike rates at the fastest pace and more aggressively in four decades, with massive QT as icing on their cake?
According to Evans-Pritchard, the monetarists are again crying the apocalypse is coming! They’re accusing central banks of inexcusable errors:
First, they unleashed the high inflation of the early 2020s with an explosive monetary expansion.
Then, they swung to the other extreme of monetary contraction – disregarding both times the standard quantity theory of money.