In a sense, Fed chair Jerome Powell has not taken his eye off inflation. He is letting cautious banks do some of the job. There is a risk, though, that credit flow could become disorganised if stress were to emerge in other parts of the US banking system, although Powell sees little scope of generic weakness. The US central bank is unlikely to repeat the policy misstep of the 1980s of easing its vigil against inflation prematurely. It will, however, have to ensure liquidity tightens in an orderly fashion. That means no more nasty surprises.
The Bank of England and the Swiss National Bank, too, pressed ahead with interest rate hikes. The former may be nearing the end of its cycle, and the latter could be more sanguine about the health of its banks after the arranged merger of UBS with Credit Suisse. European central bankers are signalling to markets the likelihood of a financial crisis is low and contagion will not be allowed to spread. Prospects of a recession in the EU are receding and elevated inflation will continue to draw policy attention. Emerging market central banks, too, have diligently built up capital buffers to ride out turbulence.
