The first eight months of 2023 may long live in central-bank-watching infamy.
The ranks of highly trained monetary observers rolled into January supremely confident they knew where interest rates were headed and why.
Though the when was uncertain, the Federal Reserve would surely soon finish tightening and the Bank of Japan would be hitting the brakes. The People’s Bank of China would be grappling with the inflationary implications of the nation’s post-Covid growth explosion.
Wrong, wrong and wrong. Granted, even the smartest central bank gurus get it wrong now and again. But virtually everyone everywhere all at once?
What’s more, here in Asia, market types are still finding their views afoul of what the Fed, BOJ and PBOC are very clearly telling us.
Take Fed Chairman Jerome Powell, who assumed the role of party pooper at last week’s monetary retreat in Jackson Hole, Wyoming. There, Powell warned that “additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
That’s Fed-speak for expect at least one more rate hike. The 11 tightening moves the Fed made over the last 17 months, the most aggressive action since the mid-1990s, hasn’t done the trick to tame inflation.
The conventional wisdom this year had been even wronger about BOJ Governor Kazuo Ueda. Though only on the job since April, Ueda was almost certain—in the views of most traders—to be wrapping up quantitative easing by now.
Hardly. At the same confab in the Grand Tetons last week, Ueda signaled that bets on BOJ “tapering” this year were dead wrong. And they could be wrong again in 2024. Ueda, as he’s clearly telling us, isn’t the maverick investors thought.
More recently, on August 31, BOJ board member Toyoaki Nakamura stressed it’s premature to expect an end to Japan’s 23-year experiment with QE. “The key is for the economy to keep recovering,” Nakamura told a news conference. He added that “once there’s a general feeling Japan’s deflationary mindset has been eradicated, we won’t need yield curve control. But we’re not there yet.”
Let’s hope we’re not talking 23 years from now. In the interim, though, it’s fair to blame China to some extent for economists being so off this year. The idea of Asia’s biggest economy falling into deflation was basically on no one’s possibilities list for 2023.
Ueda says China’s economic uncertainty has complicated decisions in Tokyo, given that it’s Japan’s top trading partner. China’s July data on retail sales, business investment and industrial production were “on the weak side,” Ueda said this week. “The underlying problem appears to be the adjustment in the property sector and its spillover to the rest of the economy.”
Arguably no government in Asia is more sensitive to the specter of China exporting deflationary energy. A deflationary China really is in no one’s interest.
Still, the ease with which Asia is taking Powell’s clear warnings that more tightening is coming is perplexing. Is it born of complacency? Or a high degree of confidence that Asia has been stress-tested enough by Washington these last 17 months and can handle a bit more austerity?
This is debatable. What’s not is that Powell’s team seems determined to push the U.S. into recession. Perhaps consumer prices topping 9%, a 40-year high, convinced the Fed’s research staff that only negative growth will work. They may be convinced it’s the only way to get today’s 3% inflation rate back down to 2%.
Asia shouldn’t downplay the risks here. A U.S. recession would coincide with the slowest Chinese growth in three decades, a Europe muddling along and Japan actively allowing the yen to test 33-year lows.
The U.S., meanwhile, features a recession in something else: political sanity. As the recent Fitch Ratings downgrade demonstrated, the health of the dollar and U.S. Treasury securities, the linchpins of global finance, are subject to warring political factions in Washington.
Never mind the $3.2 trillion-plus of Asian savings sitting in U.S. government debt. The bigger question is why Asia isn’t more worked up about Powell going even further to stress-test a U.S. economy that’s been through more than enough these last few years of pandemic, political dysfunction and Fed acting like it’s the 1990s all over again.
As wrong as central bank watchers were about the start of 2023, it’s hard not to worry they’re even more wrong about how this year may end.