[New York Diary] Central Banks and the Fate of Polar Bear Knut

A debate over the Fed's "courage to kill the bear"
BlackRock compares current inflation policy to the fate of Knut
Calls for discussion on balancing growth and inflation
Questions rise over effectiveness of rapid rate hikes
Seeking the "lesser evil" in central bank decisions

[Asia Economy New York=Special Correspondent Joselgina] Do you remember the baby polar bear Knut? Born in 2006 at the Berlin Zoo in Germany, Knut was a global star who appeared on magazine covers, merchandise, and even in movies.

When he was born prematurely and abandoned by his mother, there were initial voices saying "humans should not interfere in the life of a bear." The head of Aachen Zoo publicly insisted that "a cub abandoned by its mother should be left to die." However, such statements that "we must have the courage to kill the bear" instead led to various protests and backlash from citizens. Afterwards, Knut was raised by zookeepers under the protection of the Berlin Zoo.

A report has drawn attention in the U.S. Wall Street suggesting that the Federal Reserve (Fed), the central bank, seems to have a mindset similar to some of the past claims when Knut was abandoned by his mother ? that is, "we must have the courage to kill the bear." This is the report titled "Spare the bear: the inflation debate that should be happening," released on the 14th (local time) by BlackRock, the world's largest asset management company.

Jean Boivin, Head of BlackRock's Investment Institute, and Alex Brazier, Deputy Head, compared the recent economic situation to the fate of the polar bear Knut in this report. They suggest that the Fed is thinking of "letting the bear (the economy) die" to control inflation. The report first acknowledges that this thinking might be correct. However, it immediately points out that it is never that simple as the Fed thinks. It argues that before justifying rapid interest rate hikes at this point, an "inflation debate" should take place first.

The recent inflation situation is different from previous years. For one, it mainly arose from supply chain shocks, and there is a sharp balance between growth and inflation. This is why there are arguments that raising interest rates to suppress demand may not be the right solution. Moreover, even after consecutive giant steps (0.75 percentage point interest rate hikes), the peak of U.S. inflation has not been confirmed, leading to increasing voices in the market questioning the effectiveness of the policy.

Therefore, the report says a debate is necessary at this point: "Where should the balance between growth and inflation be placed, and what is the appropriate pace to achieve the 2% inflation target?"

Boivin and Brazier dismissed the Fed’s claim that it can achieve the 2% target without a recession as "wishful thinking." They also pointed out the "contradiction" that while the Bank of England (BOE) believes a deep recession is inevitable to lower inflation, the UK government is pursuing expansionary fiscal policies to avoid it.

The alternative they propose is that investing a long time to reach the 2% inflation target can reduce the damage to growth. However, if interest rates are raised slowly to respond, the longer duration of high inflation could be a cost of that choice.

Returning to Knut’s story, the polar bear raised by human hands could no longer socialize with his own kind and died at age four after falling into a pond.

Bitterly, what central banks must now consider may also be "what is the 'less bad outcome,' that is, the lesser evil."

This content was produced with the assistance of AI translation services.