The policy paradox: conditions increasing for policy mistakes

2021 brought the recovery many had hoped for. Businesses reopened, commuters returned to their desks, and the bravest of us even went on holiday. But no one could describe it as ‘getting back to normal’ amid rocketing energy prices, high debt levels, and past-the-peak growth, writes Andrew McCaffery, global CIO at Fidelity International.

These conditions increase the risk of a policy mistake in the next 12 months as central banks and governments try to navigate various ‘Catch-22' (or Catch-2022) narratives - reminiscent of the conundrums faced by the air crew in Joseph Heller's 1961 novel - without losing the trust of markets. One dilemma is how to tighten monetary policy and rein in inflation without killing off the recovery. Another is how to cope with higher energy prices as the world transitions to a low-carbon economy. Fine-tuning policy settings to unravel these conflicting dynamics will not be easy.