If equity markets had spent much of the northern summer in a kind of cognitively dissonant, possibly rosé-induced haze, it did not take long for them to crash back to reality on Friday. Under nine minutes, to be precise, which was the entire duration of Federal Reserve Governor Jerome Powell’s unusually brief speech to the annual central banking confab at Jackson Hole.

To use the words of another central banker, he is willing to do “whatever it takes” to get inflation back under control, even if this will entail lower growth and higher unemployment. The market, reluctantly, finally seems to be getting the message.

Stocks moved instantly, with the S&P500 dropping 3.2% in minutes and the tech-heavy Nasdaq being hit even harder. Cryptocurrencies such as bitcoin fell by almost 10% within hours.

Investors in the bond market, by comparison, merely shrugged. They had seen this coming. While the blindly optimistic equity bulls have been wishing away a recession, bond yields have been flashing recession warning lights for months. The US 10-Year, the global benchmark for bonds, is trading at about 3.11%, broadly where it was in mid-May. Although the curve has moved out marginally over the past month, indicating higher inflation, it remains inverted. This is a clear sign that, although inflation in the near future is running hot, in the longer term the outlook for global economic growth is moribund.

It must have been a deeply awkward and difficult speech for Powell to make, which may explain its brevity. Only 12 months ago, Powell used his address in the Wyoming mountain resort to explain why inflation was just a transitory phenomenon, mainly from post-pandemic supply chain blockages. As soon as those were resolved, he was adamant that prices would “normalise”.

That Powell and his cohort of central bankers attending Jackson Hole have been spectacularly inept and dangerously delusional is self-evident. Despite warning lights flashing throughout 2021, they continued to believe we were still in the post-2008 financial crisis period when every price spike, even of energy, barely affected the overall price level.

In a move that now seems ludicrous, the Fed even changed its inflation-targeting framework during the pandemic, announcing it would be less reactive to anticipated inflation and would keep policies more accommodative for longer. Hindsight might be 20/20, but to get their one job — understanding price dynamics and preventing inflation — so spectacularly wrong calls into question the credibility of the Fed itself. Now the world is facing the highest and most entrenched inflation for 40 years.

And yet, though the situation is far from ideal, further rounds of central banker bashing will not help to resolve the situation, least of all for struggling consumers.

Writing in the Financial Times last week, former head of the Central Bank of India Raghuram Rajan argued that, instead of continuing to attack their incompetence, we should simply allow them to get on with their job of battling inflation. Questioning mandates and central bank independence will only make markets more jittery.

Many compare the current bout of stagflation to the 1970s. Then, it was only after six years of breakneck inflation that Paul Volcker — whom Powell expressly cited in his speech, a clear nod to his intentions — finally hiked rates aggressively enough to quell price rises and kick off the boom years of the 1980s. We are in a sense lucky that Powell is reacting so promptly and aggressively.

Powell may not be a central banker of the calibre of Volcker, but he is all we have. He, and his cohorts at Jackson Hole, should be applauded for their (admittedly tardy) single-minded focus on price levels, which is the only way to return the global economy to some semblance of stability, even if it risks substantial economic downside in the short term. Investors should stop complaining and allow them, including South African Reserve Bank Governor Lesetja Kganyago, to just get on with the job. DM168 

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.