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How Central Banks Won the Battle But Lost the War - BLOOMBERG
(Bloomberg) -- As US inflation subsides and the Federal Reserve readies its first interest rate cut since the pandemic, central bankers must confront a new reality: in the fight against rising prices, they are no longer the only show in town.
For the last 40 years, central banks wielded interest rates to keep inflation under control—and they often looked like maestros doing it. But then the coronavirus struck, and with it came lockdowns and a sudden recession. Governments prescribed massive cash expenditures to keep economies afloat, but that medicine came with a side effect: inflation. At first, Fed Chair Jerome Powell called rising prices “transitory.” He was wrong, and Americans saw their cost of living rise more than 9% in a year. In the Bloomberg Originals mini-documentary How Central Banks Won the Battle But Lost the War, we explain why the Fed’s delayed reaction may have diminished its power.
The past four years have made clear that there are inflation risks central banks are ill-equipped to fight. Monetary policy is a powerful tool for managing demand. But it isn’t as effective when it comes to fighting supply shocks—from energy shortages to missing semiconductors—that are the new triggers of rising prices.
These days, governments are asserting more control over supply chains, promising to take on industries they say are gouging consumers while also looking to make housing more affordable. Central banks have succeeded in bringing inflation back to target. But as we show in How Central Banks Won the Battle But Lost the War, managing inflation in the future may become more of a team sport.
