A gap has emerged between the US central bank and its peers at a time when its policy signals have become at odds with financial conditions.
Last week was a lesson in central bank “unusual” — developments that are less common and deserve to be thought through carefully as they speak directly to the future wellbeing of the global economy.
But the difference between the Fed on the one hand and the ECB and BoE on the other is not limited to words. We are also seeing a divergence in policy developments and prospects.The Fed appeared last week to have taken a hard turn towards expecting a soft landing — that is, inflation heading down to target with little damage to economic growth. The other two central banks seem more worried about inflation persisting and, therefore, a hard landing such as a recession or, worse, stagflation.
Another, and potentially more consequential contrast is between how the Fed portrayed financial conditions and what the most widely followed indices are telling us. It could well be, as suggested by vice chair Lael Brainard a few weeks ago, that the Fed is guided by a slimmed down view of financial conditions. That would be similar to its approach for inflation where it is now paying a lot of attention to core prices in services excluding housing.
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