There was a time when currency was straightforward and central banks were secret. While it is always a challenge to remember things that are not worth the nostalgia, it is hard to forget the extreme of it. A consensus among bewildered people would attribute that high point to Alan Greenspan, who took over as head of the US Federal Reserve from inflation-killer Paul Volcker in 1987, influencing investors and politicians alike for nearly two decades. and will remain embedded in memory for what he once said to a gathering of trade-folk: “If I’ve made myself too clear, you must have misunderstood me.” Jaws duly dropped. If some people doubted the authenticity of Greenspan’s words, it was not because social media had not yet come to terms with how clearly they were true. As Fed chief, he was not only given to policy statements that left wide scope for alternative interpretations, the ability to decode them was prized by market players. Strategic accuracy was seen as an integral part of the central banker’s job at the time. Indeed, the trade-offs world had no place for ‘one-handed’ economists, taken as a good thing was.
In the field of economics, the tyranny of either of the two has not diminished. It is still about the choices we must make to satisfy unlimited needs (and desires) within the limits of our resources. One thing is often at the expense of another. However, the calls we assign to central banks have gained such public importance from one crisis to the next that whatever they take, they are expected to explain their actions. This has led to a new era of clarity – if not contradiction – in central bank articulation. Like anything in the economy, this too is of course relative. But it matters. At a regular congressional hearing on Wednesday, the current head of the US Fed, Jerome Powell, was asked about the risk of a recession now that it is on a rough path with the policy rate of interest. “It’s not exactly our intended outcome, but it’s certainly a possibility,” he acknowledged. “We are not trying to provoke and do not think we will need to provoke a recession. But we do think it is absolutely necessary that we restore price stability, really, for the benefit of the labor market as much as anything else. ” This testimony of the Fed’s priority is hardly clear.
Back home, the Reserve Bank of India (RBI) has also been in candid mode. At an event last Friday, Governor Shaktikanta Das spoke in an unapologetic defense of his easy-money policy in response to the Covid crisis. “Tolerance of high inflation was a necessity and we stand by our decision,” he said, “…just imagine what would have happened to growth if we had started raising rates sooner? An RBI back towards its legal mandate of inflation control, however, is evident from May 4. And its rate-setting panel’s June 8 record was disclosed a fortnight later with Das’s view: “The time is right for further hike in the policy rate to effectively tackle inflation and inflation expectations… Accordingly, I vote for a 50 basis point increase in the repo rate, which would be in line with the evolving inflation-growth dynamics and help mitigate the effects of a second round of unfavorable supply shocks.” Welcome. Both economies face the crisis of uncontrolled prices. The two have officially sworn to subdue him. Nor should your goal be allowed to change. Or the crypto enthusiasts who dismiss central banks for their stupidity, have the last laugh.