Central Banks Face a 2022-Style Test
From Washington to Frankfurt, monetary authorities must balance credibility, growth risks and mounting external pressure. A commentary by Ignazio Angeloni
In a situation increasingly reminiscent of the 2022 energy crisis, central banks — led by the US Federal Reserve and the European Central Bank — are once again putting their hard-won credibility on the line.
In recent years, they managed to bring inflation under control at relatively limited cost to economic activity. The risk of missteps is now extremely high. Timing and foresight will be critical.
The Fed faces the more complex challenge. With almost three years left in office, the occupant of the White House has made the central bank a preferred political target. In the worldview underpinning Trumpism, the economy is seen as a unified political space that leaves little room for independent authorities.
The clash is therefore structural and likely to persist, whatever the pretext. Inflation has not yet returned to target.
This is not primarily the Fed’s fault — energy shortages and trade tariffs have played a significant role — but the numerical gap constrains policy choices and leaves the central bank exposed. It risks becoming a scapegoat for a cost-of-living squeeze that remains politically sensitive.
Complicating matters further is a contentious leadership transition. The designated successor, financier Kevin Warsh, has promised to modernise what some see as an outdated institution. Yet in seeking confirmation he has signalled a willingness to lower interest rates.
His argument — that productivity gains from artificial intelligence will ease inflationary pressures — appears tenuous.
Such gains are uncertain and distant, whereas inflationary pressures are immediate. The broader point is that economic conditions are subject to competing interpretations, feeding uncertainty.
The Federal Open Market Committee currently appears opposed to any easing of monetary policy. Assuming the nominee is confirmed — last week’s hearing was turbulent and failed to dispel concerns about opportunism — the task ahead will be formidable. Internal divisions risk undermining both the authority and the perceived independence of the central bank.
The ECB faces a different set of constraints. Before the outbreak of war, it had already brought inflation back to its 2 per cent target for several months. It now confronts the classic dilemma of a supply shock: how to contain inflation without exacerbating a slowdown in real activity.
In theory, there is no ambiguity. The ECB’s mandate is to maintain price stability, full stop. In practice, the framework is more flexible.
The emphasis on the “medium term” in the definition of the target allows for some discretion.
Given the eurozone’s structurally weak growth, a recession — especially if accompanied by widening divergences among member states — could once again threaten the cohesion of the currency union, and with it price stability itself. For Frankfurt, the challenge is to strike an appropriate balance between its inflation objective and a pragmatic assessment of broader economic conditions.
The picture is further complicated by the question of Christine Lagarde’s succession. Her term runs until late 2027, but speculation about an early departure is already circulating. Betting markets are active and potential candidates are positioning themselves: the Financial Times has recently published a survey ranking the leading contenders.
Few developments undermine central bank credibility more than the perception that policymakers are weighing alternative career prospects. This risk should be avoided, but cannot be ruled out. Succession dynamics may well influence interest rate decisions in the coming months.
In the end, realism and data must prevail. The experience since 2022 shows that energy shocks rarely have purely temporary effects.
Modern value chains and the dynamics of expectations tend to spread their impact across more persistent components of prices. Once that happens, inflation becomes entrenched and delayed monetary tightening proves costly.
There is little reason to believe that 2026 will be different. If that is the case, further rate adjustments will be unavoidable. Better to recognise it sooner rather than later.
A previous version of this article was published in the Italian daily Affari e Finanza - La Repubblica
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
