Hawks and doves play chicken on central bank decisions

Hawks and doves play chicken on central bank decisions

For markets, 2022 will be the year of playing chicken.

Inflation has raced higher in the past year, well beyond most central banks’ tolerance levels. So the time has come for policymakers to start withdrawing the stimulus that pushed asset prices up after the pandemic first hit, nearly two years ago.

Some central banks have already started removing the support they pumped into the financial system. Among them is the Bank of England which, in December, surprised investors with its first interest rate rise in three years.

And the most influential of them all — the US Federal Reserve — has started trimming asset purchases, as well as signalling that it will deliver three rate rises over the course of the year. Investors increasingly think the first could come as soon as March, and that three could be too conservative. The question is whether the Fed can do that without destabilising financial markets.

Hence, the high-stakes test of nerves. Corporate earnings and economic growth of course matter to fund managers, but the direction of interest rates is the dominant issue across all asset classes.

Policymakers shrugged off surging inflation for close to a year. Whether they will now get tough and stick with their intended