The Economist April 2nd 2022 Finance & economics 67agreements for Russian crude by Indian
staterun oil companies. Hindustan Petro
leum was said to have purchased 2m bar
rels and Indian Oil 3m barrels; Mangalore
Refinery and Petrochemicals has sought to
buy 1m. Others are said to have made bids
for Russian oil, too.
All told, the amount comes to perhaps
15m barrels, around three days of India’s
consumption. But this is seen as the first
sign of closer engagement. Russia is said to
have offered to pay transport and insur
ance costs, while offering steep discounts.
The main difficulty, though, is pay
ments. To deal with Iran after it came un
der sanctions in 2011, India used Uco Bank,
a staterun firm with foreign operations
that extended only to Singapore, Hong
Kong and Tehran, and which was therefore
outside the West’s regulatory net. This
time around, however, Singapore has
cracked down on Russian transactions,
meaning Uco cannot be used.
India’s government and central bank
are therefore mulling other options. One
idea that is reportedly being considered is
using spfs, Russia’s alternative to swift,
to conduct crossborder transactions,which would circumvent the dollar’s fi
nancial plumbing. Another proposal, ac
cording to the Economic Times,involves us
ing the Indian operations of several large
Russian banks as a conduit for transac
tions, by opening rupee accounts for Rus
sian exporters.
The problem, however, is that trade be
tween the two countries is unbalanced: In
dia imports more than twice as much from
Russia as it exports, which would leave
Russiansellersholding on to unwanted ru
pees. PlentyforMr Lavrov and his hosts to
chew over.nF
ightinginflationgetsharderthe
longer it is put off—and the Federal
Reserve has waited quite a while. For
most of 2021 the central bank said that it
had the tools to slow price rises, but saw
no need to put them to use. Now in
vestors are coming to terms with the fact
that the Fed will have to deploy them at
scale. Since March 1st the threeyear
Treasury yield has risen by more than a
percentage point, the biggest absolute
change since yields collapsed in January
2008 during the global financial crisis.
The move reflects the emergence of
expectations that the Fed will increase
interest rates by another two percentage
points this year, having already raised
them by a quarter of a point on March
16th. The impact has been felt worldwide.
On March 28th the Bank of Japan prom
ised to buy Japanese government debt in
unlimited quantities over four days in
order to defend its cap on the tenyear
governmentbond yield. The yield on
tenyear German bunds, which turned
positive only in January, now stands at
over 0.6%, even as soaring energy prices
darken the growth outlook.
The most important question for
bond investors in America is whether the
higher interest rates that are arriving
hard and fast can bring about a fabled
“soft landing”, in which the heat is taken
out of the economy without provoking a
recession. Past experience suggests that
this will be difficult; tightening has often
preceded downturns. Jerome Powell, the
Fed’s chairman, has pointed to success
ful soft landings in 1964, 1984 and 1993.
But those comparisons do not account
for the difficulty of the present situation.
In none of those cases did the Fed let
inflation rise as far as it has today.
The central bank’s latest projections
are rosy, portraying what its critics havedubbedan“immaculate disinflation”:
three years of steadily falling inflation,
despite gdpgrowth remaining above its
longrun trend and both the unemploy
ment rate and the Fed’s policy rate remain
ing unusually low. Mr Powell may have
given up calling inflation “transitory”, but
these forecasts make sense only if in
flation goes away of its own accord.
It seems likelier that the central bank
will have to squeeze inflation out of the
economy. Noting that there is no prece
dent for doing so gracefully, Bill Dudley, a
former head of the New York Fed, wrote in
a Bloombergcolumn on March 29th that a
recession was now inevitable. The rword
is also in the air because yields on some
shortterm bonds have risen above those
on longerterm bonds. Such a yieldcurve
“inversion” suggests that investors expect
interest rates to be cut eventually as the
economy weakens.
An inverted yield curve is often regard
ed as a sign that markets think the central
bank is making a mistake. The uncomfort
able truth, however, is that a recession and
a mistake are not the same thing if causinga downturn is the only way to restore
price stability. In the 1980s Paul Volcker’s
Fed vanquished inflation by inducing
recessions that pushed the unemploy
ment rate to 10.8%. Nobody accuses it of
having done so inadvertently; rather, it
chose to pay the high price of disin
flation. That is not a position in which
today’s central bankers want to be; they
talk as much about their duty to support
jobs and growth as they do about ensur
ing stable prices.
The good news for Mr Powell is that
for all the chatter about the yield curve,
investors remain mostly on his side.
Most economists put the neutral level of
interest rates, at which monetary policy
is pressing on neither the accelerator nor
the brake, at around 22.5%. Both the Fed
and the bond market expect the policy
rate to overshoot that level only slightly.
Rates a notch or two above neutral can
hardly be compared with Volcker’s tight
ening. The market expects immaculacy,
too, believing that modestly tight money
will be enough to control inflation.
The recent predictive record of both
central bankers and bond markets has
been poor, however. Just a year ago the
Fed’s message was that it was not even
“talking about talking about” tightening
monetary policy, and investors expected
consumer prices to rise by just 2.7% over
the following year. If they are caught out
again, the Fed could find that meeting its
inflation target demands that it induce a
recession. The yield curve would then
invert more steeply.
In that scenario America would pay a
dear price for the glacial pace of action in
2021, which was justified, ironically, by
the supposed dangers of sudden moves.
It has left the central bank, the world
economy and asset prices on more peril
ous ground.ButtonwoodLate to disinflate
Can the Fed pull off an “immaculate disinflation”?