Now even central bankers blame themselves

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For central banks, the pandemic may have been the easy part.

To support economies and markets during the early days of Covid-19, authorities pumped huge sums into the financial system. They might worry about the hangover later, or so the thought is gone. And judging by the decade before, stimulus-induced inflation was not a problem. No one wanted to be accused of moving too slowly or doing too little – a criticism that has plagued policymakers in the years since the 2008 debacle.

Now an autopsy of the latest episode of massive easing is underway, courtesy of the Reserve Bank of Australia. This makes reading difficult.

The RBA is more used to accolades than scrutiny, given Australia’s long recession-free period before 2020. While there is a bit of defensiveness in this self-assessment – things looked dire era, and so on – there is also a good dose of humility. The central bank has tried to keep the yield on three-year government bonds around zero for too long, giving traders the impression that the bank’s withdrawal from politics was yielding. “The target was met for most of the period, but the exit at the end of 2021 was disorderly and associated with bond market volatility and some market dislocation,” the RBA wrote. “This experience has caused reputational damage.” The report also noted that officials have not given enough public attention to the prospect of a rapid economic rebound. The RBA’s forecast that conditions were unlikely to warrant a hike in the main interest rate until 2024 is therefore exceeded. Rightly so, given that it was late to start raising interest rates and pointed to a quick catch-up. Governor Philip Lowe said on Tuesday that rates would likely rise 25 to 50 basis points in July.

Although nominally an assessment of the RBA’s efforts to control yields, the review functions as a post-mortem project over a considerable stimulus period that included the reduction of the benchmark rate to nearly zero and quantitative easing. The yield experiment ran from March 2020 to November last year. Lowe is not eager to repeat it. (QE is probably more palatable; a separate review is pending.) One thing that stands out is how difficult it was for the RBA to extricate itself from a single crisis response without the entire policy framework does not collapse.

The bank claims to speak only for itself, but the document is a useful assessment for a broader monetary experience that stretched from North America to Europe and Asia. Along with the rush to recalibrate comes a scapegoat hunt for runaway inflation that followed the rapid recovery. Former American. Treasury Secretary Larry Summers, once a candidate for the leadership of the Federal Reserve, is ruthless in his criticism of the Fed under President Jerome Powell. “Returning to humility, abandoning foresight as a political tool is entirely appropriate,” Summers said in a speech Monday. “It will likely be necessary to make much tougher choices than expected between accepting easing and accepting sustained, above-target inflation.”

It should be noted that the RBA considered a so-called unconventional policy long before deaths rose, markets distorted and borders closed. Lowe had previously signaled the possibility of bond buying to drive up prices. In his concern about too low inflation, the governor was in good company. Janet Yellen, now US Treasury Secretary, said when she was Fed chair that the failure of inflation despite unemployment and low interest rates was a mystery.

Even with soaring inflation, it is too early to cancel the use of pandemic tools in the future. QE was once considered exotic and useful only to perceived economic failures like Japan. It then became totally mainstream. Same thing with interest rates close to zero.

Yield control efforts, however, haven’t won many fans. Australia was the only developed economy that started and ended the fiscal year during the Covid era. (The Bank of Japan still controls the yield curve, a practice it began in 2016.) Few are likely to consider it in the future – and anyone remotely tempted to do so should read this bulletin. RBA and think again.

More from this writer and others on Bloomberg Opinion:

• The dire warnings about fighting inflation are coming true: Daniel Moss

• Powell loses his stock market touch after the meeting: Jonathan Levin

• BOE joins the Scream-If-You-Wanna-Hike-Faster gang: Mark Gilbert

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

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