It may well be that central bankers around the world have never seen their credibility on trial like it has been in 2021. Perhaps one Christmas present we can all wish for is genuine guidance from those who purport to provide it in 2022. To my eyes, the ‘guidance’ provided in 2021 has been an exercise in plausible deniability of both motive and interpretation that is long on keeping options open and short on shedding light on what the path forward is likely to entail.
The ongoing debate between ‘team transitory’ and ‘team persistent’ has grown tiresome – mostly because central bankers have redefined ‘transitory’ a couple of times already – and may yet do so again, for all we know. Last week, the federal government and Bank of Canada issued a joint statement clarifying that, aside from an explicit jobs-related nuance noting that had heretofore been only a tacit understanding, the Bank of Canada’s mandate was essentially unchanged.
Notwithstanding some modestly hawkish comments, the strong consensus remains that central bankers have nowhere to go. If they hike rates, they will almost certainly destroy the recovery and the long-running bull market. If they continue to sit on their hands, they will lose credibility as custodians of national price stability. Their story until now has been rooted in the year over year numbers being artificially inflated due to 2020 being such an anomalous outlier. The outlier numbers start to drop out of the dataset in March, however. By March, 2020, the market had found a bottom and the details of both the new monetary regime that persists to this day and the new fiscal approach that it afforded were known, understood and, to a large extent, already implemented.
If one were to throw out the March 2020 to March 2021 data and use the March 2021 to March 2022 data as the new baseline, there’s a reckoning coming. Central bankers have until the end of Q1, 2022 to cling to the old story about why they have not acted while inflation is at a generational high. At that time, they must either act (read: raise rates and consequentially tank both the economy and markets) or not (read: admit that they have been selling us a false narrative all along, thereby losing whatever credibility they still have left). In the next 100 days or so, central bankers will have to come clean and the obfuscation will end. Either way, it will not be pretty.