Monetary policy

Central banks deadly wrong

“I want to point out the central banks 18 months ago were 100% dead wrong.” Jamie Dimon, CEO of JPMorgan Chase said recently. I cannot agree with him more.

Eighteen months ago they categorized the rising inflation as transitory and soon abandoned that concept by ignoring

1/ that the dynamics of inflation could last as long as between year and 18 months.

2/ there was a lack of supplies due to economy closes during COVID.

3/ government spending and fiscal support was enormous at that time and there was a strong underline to push up prices of everything.

Subsequently the central banks started to hike interest rates and accelerated that process. Again they made several mistakes:

1/ forgot to assess the impact of rising interest rates on financial stability.

2/ made no effort to recommend government to reduce fiscal stimulus. Fiscal spending has more direct and immediate impact on inflation.

3/ data dependent approach is fundamentally wrong to guide monetary policies. For a control system with large time delay, an effective control strategy has to be forward looking, not based on the data of today and yesterday.