Dario Perkins, of the economics analysis firm TS Lombard, recently wrote about Central Banks’ motivations with respect to recession.
As he points out, we should think about things from the point of view of a Central Banker. One of the reasons for Central Banks is to prevent the 1970s’ era of high inflation / stagflation from reoccurring. So as we look at increasing price inflation data (especially when we include fuel and food), it is clear the Bankers face an “existential threat” - if they let recession get out of hand, they’ve lost at their core reason for being.
In addition, from the Bank’s point of view, recessions not only happen frequently, they don’t reflect badly on the Bank’s reputation. If you read economics, you’ll notice that Paul Volcker (who forced a recession to break the US out of the stagflation era in the early 80’s) is considered a hero for his tough action.
Plus, the timing is great to focus blame on Russia’s invasion of Ukraine as the straw that forced the situation. In any case, Central Bankers won’t lose their jobs for forcing a recession. They will for letting inflation get even further out of hand.
As Mr. Perkins writes, Jerome Powell, Christine Lagarde, and their colleagues do not want to be cited in future economics classes as having led another historic monetary failure.
This is not, of course, abstract at all for those of us who aren’t with the Central Bank or tenured at big universities. A recession would lead to lost jobs, and affect broad sectors of the economy.
As long as the Central Bank believes that monetary policy is key to low-inflation, and that if they lose control of things now, a high-inflation regime will snowball in intensity, they are going to prioritize stopping that inflation growth at pretty much any cost. So, expect to see more hints about Volcker's heroism and the importance of stopping inflation over the ill-effects of recession. As they say, expect the best but prepare for the worst.
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