Should central banks aiming for low inflation and ample jobs adjust rates quickly or gradually?

Why it matters: That is the choice the world's leading central banks faced in 2022, as high inflation took root. Their different choices — and results — could shed light on which strategy is best in the future.

• At a Boston Fed conference Friday, former Bank of England official Kristin Forbes laid out the relative trade-offs of central banks that acted as tortoises and those that were hares in the monetary tightening cycle of the last two years.

Flashback: Some central banks (the tortoises) largely held to the past pattern of moving slowly and relying on small, quarter percentage point rate hikes; meanwhile, the hares ripped up the playbook quickly, and hiked rates 0.75 percentage points or more at a time.

• The tortoises included the Bank of England and the central banks of New Zealand and Norway. The hares include the U.S. Federal Reserve, the European Central Bank, and the central banks of Sweden, Australia and Canada.

What they're saying: "Each of these strategies does have some important advantages and disadvantages," said Forbes, an economist at MIT.

• With a tortoise strategy, she said, you can "tighten a little, see how it's affecting the labor market, see how that's feeding through into inflation and then see if you need to do more."
• "Also by moving more slowly in the tortoise strategy, that allows entities to adjust and reduces the risk that something breaks," she said.
• "Households have more time to plan ahead. Companies have more time to plan ahead and financial institutions have more time to plan ahead if you move more slowly."

Yes, but: "The tortoises also took longer to get where they already thought they needed to be," Forbes said. By contrast, the hares' more aggressive action may have helped strengthen the central banks' credibility, and thus made it less likely that inflation become entrenched.

The big picture: Forbes then compared the economic results of the tortoises and hares, and found the hares have achieved both bigger reductions in inflation and less labor market pain.

The bottom line: So far, at least, the central banks that have moved fast have gotten better results for their economies than those that took it slow. Whether that has broader lessons for the future is still an open question, however.

Go deeper

In coming months, a debate will begin on how the Fed should approach its monetary policy. Its every-five-years "framework review" is on track to begin in 2024, and conclude in 2025.

Driving the news: But in Boston Friday, there was some early discussion of what it should entail, as a former top official argued that the last version of the framework, released in 2020, may have contributed to the outburst of inflation in 2021.

What they're saying: Don Kohn, former vice chair of the central bank, emphasized that the 2020 framework wasn't the main reason for inflation. "For crying out loud, it was the COVID distortion, supply and demand, etc.," he said.

• But he does say that it made "the inflation a bit higher and more persistent than otherwise" would have been the case. "That has its costs," he said.
• He pointed to "several asymmetries" in the 2020 framework in which policy reacted to employment below the perceived maximum, but not above.

The intrigue: "I think when the committee goes back to review… its framework, a framework should produce acceptable results for the dual mandate under a wide variety of circumstances," said Kohn, an influential voice among global central bankers.

Of note: When reporters asked Boston Fed president Susan Collins about the framework review Friday evening, she said: "I think it's important to emphasize that over the medium to longer run, and that two parts of our dual mandate are really complementary, and they're intertwined."

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