When will the dollar start its run?
Central bank philosophical regime change, BoJ/BOK: North Asia voice, Naturally levels of volatility
New central bank regime starting?
June may be the month the market stops pricing derelict central banks as a major risk factor. Not the beginning of the prophesied hard money phase just yet, but an end to the market view of central banks as simply backstops and vol killers. A change in mentality from “anything for growth,” or avoid the hard decisions because “global disinflation will always bail me out.” It won’t start as a massive wave, but the trickle is beginning.
The ECB, Fed, and BoJ all hiking rates in June would launch this view on to the front pages, as the G3 always set the tone. An early Fed rate hike would also debunk so many of the misinterpretations of Kevin Warsh as a Fed Chair. But more importantly, it will constructively change the risk management framing.
Admitting that the pressing task is not simply to deftly weigh the trade-off between the current energy supply shock being either inflationary or a hit to growth, but rather, admitting the job on inflation from the previous cycle was not complete. The starting point for this shock is what uniquely dictates the risk management view, not generic analysis of past supply shocks.
April and May central bank meetings were a muddle of responses, and policy meeting minutes reflected various degrees of change in tone. Dissensions were high (BoJ, Fed, BoK, RBNZ), while a few Banks mounted the courage to hike (RBA, NB, BI). This is what transition looks like.
Going forward, the economic circumstances may be less important than the shift in philosophical view. Central bank failures to anticipate the last inflation cycle have combined with current events to shine a spot light on central bank independence. And, central bankers understand that mission failure is the surest way to invite greater government intervention. Therefore, there is more than short term inflation risks at play here. Central banks around the world need to start displaying ‘ahead of curve’ mentality.
Without over emphasising the impact of a few central bank leaders, building momentum for institutional and philosophical change does start with individual leadership stories. Both Kevin Warsh and Shin Hyun-song, Governor of BoK, are timely appointments that can begin to change the global debate. Other global inflation hawks (Gabriel Galípolo BCB, Ida Wolden Bache NB) will soon find new birds of a feather.
