Friday, March 29, 2024 | 17:10 WIB

Disapointment in Central Bank Policy is Baseless

Jakarta, IO – Market players have tended to display their disappointment in their respective US and European central banks, arguing that these government institutions moved too slowly in their response to surging inflation – and when they ultimately got around to taking measures, they were too late and not forceful enough . 

Such views are in my opinion a bit unfair to the central banks. Critics may have based their harsh evaluations on past experience, from the 1990s, when US Fed Chair Alan Greenspan, who acted like a magician in dealing with an ongoing crisis, relied on policy tools later known as “The Greenspan Put”. Basically, the Fed Chair provided a guarantee for the capital market, ensuring that when conditions deteriorated, the Fed would be ready to step in and safeguard the market by purchasing the bonds and securities previously held by market players. While this would not generate any profit for them, it would ensure that participants would not be wiped out by losses. This period later became known as “The Great Moderation”. 

Alternatively, critics might even think back to an earlier case, in the 1970s, when Fed Chair Paul Volcker drastically jacked up Fed fund rates in order to rescue an economy suffering “stagflation” and teetering on plunging into depression. 

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