Central Bankers Choose Inflation

Peter St. Onge Peter St. Onge

Peter St. Onge

January 2nd, 2024 Comments

After The Fed's cocaine bear interest rate pivot last week, central bankers all over the world are turning to rate cuts like lemmings off a cliff.

In fact, Bank of America's Michael Hartnett now predicts 152 rate cuts globally in the coming year.

This is a problem given inflation's continuing across the major economies, with the Economist pegging final 2023 numbers at 4.1% for the US, 5.5% for the Euro area, and 6.8% for Britain.

Even Japan is at 3.2%, which is way above their target after literally decades of structural deflation.

Annual Price Increases

Fed Cuts Signal Inflation and Recession

Now, normally, central banks know better than cutting rates into inflation. Because it's Econ 101 that cutting interest rates pumps inflation. Because it makes it cheap to borrow, and people borrow to spend more.

In fact, the Fed knows this so well it's only cut rates into inflation five times since 1942 – by the way, every single time followed by accelerating inflation.

Instead, central banks wait until the last possible moment to cut. The moment when recession is just cresting the hill. At which point they cut loose with the kitchen sink in a desperate bid to stave off the coming crash.

Which gives us that classic central bank boom-bust cycle.

It never works, of course, because the Fed is incompetent: Literally every single cut since at least 1980 led to soaring joblessness. So the very cuts that are supposed to boost the economy, apparently, always come too late.

Why so late? Because while the Fed is afraid of getting blamed for its recessions, it's also afraid of getting blamed for its inflations. So it tries to trade-off the two, steal a little from here a little from there.

All pretty shabby. But the problem is forget trade-offs, at this point the Fed is cutting directly into inflation — it's not trading off, it's piling on.

For the Fed to be that desperate suggests either Joe Biden's got pictures of Jerome Powell partying with Hunter. Or it suggests this isn't a normal recession cresting the hill, this is a monster.

Chart 2: Fed Rarely Cuts Rates when Core CPI Unemployment Rate

Enter the Lemmings

And that all brings us to those lemmings, the farm team of central bankers who transmit Federal Reserve incompetence to the rest of humanity.

They, too, have been itching to cut because of stagnation. But their hands have been tied because they can't move until the Fed moves. Because their local capital would flood out to the US chasing higher returns. That would crash their currencies, which is happening to the yen as we speak.

And so, now that the Fed has waved the white flag, worldwide inflation is again on the menu, of course after a respectable bout of recession-induced deflation.

What's Next?

The irony is while the Fed's rate hikes have certainly savaged banks, companies and consumers – especially mortgage buyers.

But they haven't actually tightened financial conditions. For the simple reason that federal deficits are so large they're pulling vast quantities – so far at least a trillion – out of bank savings parked at the Fed and putting them into circulation.

Put it together, and the central banks of the world are coordinating for worldwide stagflation – slow growth and re-accelerating inflation. Once again following the 1970's disaster to a tee.

Peter St. Onge

About the Author:

Peter St. Onge writes articles about Economics and Freedom. He's an economist at the Heritage Foundation, a Fellow at the Mises Institute, and a former professor at Taiwan’s Feng Chia University. His website is www.ProfStOnge.com.