Hawks support higher interest rates and a more aggressive stance on fighting inflation. Photo / 123RF
OPINION:
Central banks risk causing an unnecessarily hard landing by raising rates too far and too quickly.
They appear to be responding to intense pressure from an older generation fearful of a return to the inflationary days of their youth.
But if central banks overdo it, the economy will collapse and younger generations will suffer.
At the moment we are in the most precarious phase of the post-pandemic recovery.
The financial markets are manic. Commodity markets aren’t much better.
Tiny news that tells us nothing new – like a Federal Reserve official repeating that inflation is bad – has an outsized impact on sentiment.
Wall Street is up 2 percent one day and down 2 percent the next. This is not healthy market behavior.
The volatility highlights the risk that the US Federal Reserve could overstate its hand, triggering a financial market meltdown and a global recession.
Economic narratives have a habit of taking root and spiraling until they are no longer well founded.
There is a good case for this happening in the first wake of Covid.
The global pandemic was unprecedented in living memory, conjectures were made as to what it would do to economic demand.
An anxious narrative prevailed, leading to – in hindsight – too long being too much appeal.
While the swift end of monetary stimulus and the sharp rise in interest rates were clearly required, the momentum is now so restrictive that we risk over-correcting.
Central bankers engineer an economic downturn to rebalance supply and demand.
It’s a complex piece of economic surgery that, as usual, they do with a hammer.
We need to see inflation peak and ease off.
But a financial crash or deep recession would be catastrophic in a world where the stress of the pandemic has already stretched society into dangerously fragmented territory.
You can see the script unfold with ominous predictability.
The US Federal Reserve is raising interest rates by 75 basis points and last week the RBNZ announced it was considering doing the same.
Interest rates have already been rising at an unprecedented pace over the past 12 months.
In New Zealand, we’ve seen eight increases in a row – five of them by 50 basis points.
Another 50-point hike in November is almost certain, taking interest rates to 4 percent – the highest level since the global financial crisis.
However, since most people have fixed mortgage rates of a year or two, we are only just beginning to see the impact of these rate hikes on the economy.
According to the latest figures from the Reserve Bank, the average fixed-rate mortgage was just 3.68 percent in August.
This suggests that almost all of the real interest rate pain is still ahead of us.
First, the higher interest rates have to hit people’s pockets, which dampens economic demand and then turns into inflation.
As we await hard data on inflation later this month, economists are looking for clues in more nuanced information.
There are some signs that the current inflation cycle is peaking.
The ANZ Business Outlook, NZIER Quarterly Survey of Business Opinion (QSBO) and SEEK NZ Employment Report all indicate that capacity pressures in the labor market are easing – albeit slightly and from record levels.
Commenting on the QSBO as a topline, NZEIR boss Christina Leung noted that “business is starting to see some light at the end of the tunnel.
A reader named Ian wrote to me.
“Hello, I’ve worked for the railways for 40 years and we’ve always worried that the light at the end of a tunnel could be an oncoming train.”
That succinctly sums up the risk here and worldwide.
The economy is actually good right now for young people who don’t have mortgages yet.
They have jobs and professional mobility. They use this mobility to advance themselves and their earning power.
Wage growth is ahead of inflation at 8.7 percent.
That’s not because companies offer annual salary reviews of up to 8 percent — it’s because young people can change jobs and get promoted.
This is clearly not such a good economy for us older people who don’t have the same level of job mobility and ability to increase our income.
What worries me is that older people dominate the political and economic narrative.
Calls for increasingly restrictive central bank policy show a lack of appreciation for the value of high employment and the long-term benefits it brings to the next generation of New Zealanders.
As a reminder, the whole hawk-and-dove thing is borrowed from the language of foreign policy — in terms of appetite for aggression and war.
Hawks of War, Doves of Peace.
Economics is all about the money supply and attitudes towards inflation.
Hawks support higher interest rates and a more aggressive stance on fighting inflation, doves are more relaxed about inflation and generally advocate keeping interest rates lower.
![Philip Lowe, Governor of the Reserve Bank of Australia. photo / file]()
Philip Lowe, Governor of the Reserve Bank of Australia. photo / file
I am suspicious of anyone who sees them confident in one camp or another, as I am with tribalists on the left and right of the political spectrum.
I’ve been feeling increasingly hawkish for about 18 months.
But it feels like the time is coming for hawks to breathe through their noses (or beaks) a bit.
Across the Tasman Peninsula, last week we saw the Reserve Bank of Australia do just that, surprising the market with a softer-than-expected hike of 25 basis points.
Perhaps RBA Gov. Philip Lowe is also suspicious of that light at the end of the tunnel.
