Rough education of central bankers

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It’s been a steep learning curve for Lee Chan-young. The central bank he led was one of the world’s pioneering economies, miles ahead of the Federal Reserve in starting to tackle inflation. And yet, the job is getting harder and harder. In his six months as governor of the Bank of Korea, Lee has grappled with sharp inflation, implementing his 0.5-point rate hikes for only two times in the institution’s history, and the bank’s We have tried to be more open about our plans. The latter is tricky even in the best of times and a daunting task when global markets are highly stressed. On paper, he came to the gig beautifully prepared. For eight years, he ran the Asia Pacific Division of the International Monetary Fund and served as chief economist at the Asian Development Bank. The challenges facing Lee summarize the challenges facing most central bankers in 2022. He was forced to contend with a spectacular rise in the dollar that sent the South Korean won soaring, forced banks to intervene in the market and was given a moratorium on how much guidance Lee would offer. . Investor. Who can blame him for predicting the next locust swarm? told the Peterson Institute for International Economics. Despite being recently appointed, Lee is no novice when it comes to the trade-offs officials typically face. There is always the question of how quickly to step up policy to keep the economy from slowing down. Added to this was the turmoil in currency markets, which ambushed Lee’s laudable efforts to inject candor into the historically opaque banking system. The won has fallen 9% in the third quarter alone and is down about 17% this year, the second-lowest loss in Asia after the declining Japanese yen. Lee has no choice but to move forward. Like many officials in emerging markets and many in developed countries, Lee is not in control of his own destiny. A common thread is the dominance of the US dollar, a product of Fed influence, and the US response to soaring inflation is commonly believed to be more in the hands of Chinese President Xi Jinping than Fed Chairman Jerome Powell. How do we encourage choices where we are?

To hear from Lee, the intention is not to reverse the local currency’s decline against the dollar, nor to hold the line on the trading screen. This is to ease the depreciation of the won and prevent worsening of inflation due to a crash. Koreans have bitter memories of the hardships they faced during the Asian financial crisis in the late 1990s. A currency implosion led to a deep depression and the country needed a humiliating bailout from her IMF.

The Fed’s direction has reversed plans, pushing its early move against inflation into a more reactive position and an embarrassing turn in forward guidance. For South Korea, Powell & Company led Lee to suspend its intention to raise by half a point after rising 50 basis points in July.

Lee was very outspoken after July’s big rate hike, suggesting that smaller steps are likely to be taken going forward. He told Peterson’s audience that there were several points he had to make. I wanted a sense of how it was flowing.In addition, inflation and wage growth are nowhere near the levels of the US and Europe.

But the turmoil in global markets, especially the acceleration of the dollar’s appreciation after the Federal Open Market Committee’s September meeting, has tripped him up. The shock exacerbated the yen’s depreciation, forcing Japan to step in to support its currency for the first time in a generation, against the reckless fiscal policy that pulled the Bank of England into bond markets to protect pension funds. It made the UK market vulnerable. “The Bank of Korea is now independent from the government, but not from the Fed,” Lee said. He was criticized for returning to 50 basis points. Close scrutiny and even harsher treatment are part of the job. Lee stresses that the guidance is not a promise, but a general warning in the financial sector. fair enough. But people tend to hear numbers and dates and focus on them. They are wired to coordinate qualifying. Reserve Bank of Australia Governor Philip Lowe would sympathize. Lowe has been criticized for suggesting late last year that interest rates may not rise until 2024. It was by no means a guarantee, but with rising interest rates and prices moving from the back cover to the head of the evening’s breaking news, we may miss the nuance. Following the disciplinary action, the RBA is conducting an internal review of his forward guidance. It is also subject to external evaluations commissioned by the government. Communication is part of the probe. The difficulty lies in trying to adapt the directional signal for monetary policy — a tool that matured during the period of low inflation after the 2008 crackdown — to a period of high inflation. The market has gone crazy for handholding. The risk is that South Korea is about to become more transparent about its course, just when things get most difficult. Perhaps Alan Greenspan’s well-studied bit of obscurity won’t go astray. This central banker’s education is brutal and far from over. I will love to hear or read Lee’s autopsy when the current drama subsides, inflation subsides and some stability returns to markets. Anyone interested in the success of South Korea’s economy, an important exporter, should wish him the best of luck.

Bloomberg Opinion Details:

• Singapore’s Warning on Global Growth Must Read: Daniel Moss

• Krugman Summers Explaining the Inflation Controversy: Carl W. Smith

• Another dub inflation story bites to pieces: Jonathan Levin

This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Daniel Moss is the Bloomberg Opinion’s Asian Economics Columnist. Previously, he was the economics editor for Bloomberg News.

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