Markets Are Pushing Fed Into Developing-Economy Territory
Its credibility eroded, the central bank appears to have a choice between risking a recession or prolonging inflation.
Judging from price movements on Monday, the Federal Reserve risks slipping further into a no-win interaction with markets that is more familiar to developing countries that lack policy credibility than to a systemically important central bank — let alone the world’s most powerful one. Absent a quick reestablishment of its inflation credential, something that the markets doubted again on Monday, the Fed would face even more of a no-win policy paradigm that would cause what, only a few months ago, was avoidable harm to livelihoods in the U.S. and beyond.
This unfortunate sequence is painfully familiar to some developing countries: