US Fed confronts mistakes as hiking cycle nears end

As the world’s major central banks near the end of their steepest rate-tightening campaign in decades, the harsh lessons of past policy errors will weigh heavily on decisions as to when and where borrowing costs peak.

In the coming two weeks, officials at the Federal Reserve, the European Central Bank and the Bank of England will decide how much more pain they need to inflict to restore price stability while trying not to send their economies off a cliff or push an already creaking banking system into crisis.

With credibility compromised by their slowness to detect the latest inflation outbreak, the trio will be desperate to avoid the mistakes of predecessors who bungled past monetary policy cycles.

For Fed Chair Jerome Powell, that means avoiding stop-go policies during the episode of Great Inflation that took off in the late 1960s. ECB President Christine Lagarde won’t want to repeat U-turns seen when price pressures were misread in 2008 and 2011. And BOE Governor Andrew Bailey will want to avoid being the “unreliable boyfriend” Mark Carney was once described as.

“The balance is not whether to over-tighten, but how much to over-tighten. Do you decide that’s enough, or do you keep going until something breaks? That’s a hard judgment,” said Michael Saunders, who was a BOE rate setter until late last year and now advises Oxford Economics. “It’s a difficult dilemma ... but no one becomes a central banker to win a popularity contest.”

While central banks will push higher, how long they stay there is a question even they have a hard time answering. No one knows how long it will take to put a lid on sticky services prices, or how fast the credit crunch will unravel demand.