Policy errors come in many forms. In 2007, the European Central Bank (ECB) tightened policy on the verge of severe recession. In 2018, the Federal Reserve hiked while the rest of the world was in easing mode, creating fractures in money market plumbing that contributed to the financial market mayhem in 2020. Today, while there is no denying that monetary policy is responsible for reducing forward-looking inflation, the extreme pace of these hikes risks invoking the old tech startup adage, “Move Fast and Break Stuff!” But the global economy is not a tech start up with a huge right tail and a high tolerance for failure, and there are early signs that stuff is indeed breaking. One need only look to the J.P. Morgan Emerging Market FX index, now trading at an all-time low, to guess what that breakage might be.
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