Washington Meetings Put Central Bankers In The Spotlight And On The Spot

• Fed Chairman Powell under fire as Bernanke wins Nobel Prize for Economics
• ECB under pressure to play catch-up with Fed
• Markets test new governments in UK and Italy

Central bankers are stepping into the spotlight at the annual meetings of the International Monetary Fund and World Bank in Washington this week, and not in a good way.

Federal Reserve Chairman Jerome Powell is under attack for going too fast with interest rate hikes after waiting too long to start, European Central Bank President Christine Lagarde is under fire just for waiting too long, and Bank of England Governor Andrew Bailey can't seem to catch a break.

Bailey on Monday sought to reassure investors by saying the central bank wouldn't stop buying long-dated government bonds at his original limit of £65 billion to bail out pension funds, but that plan backfired and pushed up yield on 30-year bonds to over 4.7%.

He will come to Washington trying to defend a gradualist approach to raising rates and his inability to counsel a runaway finance minister against tanking the British economy—not to mention the botched pension arrangement that created the bond crisis in the first place.

This all in a week when the Royal Swedish Academy of Sciences, which awards the economics prize in honor of Alfred Nobel, decided in its wisdom to cite three American economists for their research on banks, including former Fed Chairman Ben Bernanke, who got the chance to put theories he developed at Princeton into practice during the 2008 financial crisis.

The rights or wrongs or durability of Bernanke's theories can fuel academic debates for years to come, but in the meantime, Fed policymakers have to wrestle with inflation that so far has stubbornly resisted their rate hikes and was the least of Bernanke's problems at the Fed.

The heads of the Fed regional banks in San Francisco and Atlanta tried last week to convince investors that they should not count on the Fed to lower rates next year, but investors think they know better and that a real recession will frighten the central bank into reversing course.

The inability of Federal Open Market Committee members to persuade investors about their intentions says something about the shredded credibility of policymakers who don't seem to be following any playbook and who denied for nearly a year that burgeoning inflation was anything but transitory.

In any case, the more immediate problems for the Fed are robust employment figures and high inflation. Friday's report that US nonfarm payrolls increased by 263,000 in September and headline unemployment declined to 3.5% from 3.7% confirmed the belief in markets that the Fed would raise its policy rate in November by another 75 basis points.

The European Central Bank came out with a study on Friday that concluded inflation was not solely due to supply chain disruptions but is also being driven by demand. That conclusion, along with an ECB survey finding that the public is now expecting sustained high inflation, suggests more tightening of monetary policy. Besides, the ECB has to keep pace with Fed increases just to protect the euro's exchange rate.

The new UK finance minister, Kwasi Kwarteng, has found out the hard way that you cannot simply ignore bond investors and just do what you think is right. If he is to survive in office, Kwarteng now has to produce a credible plan by the end of the month on how he aims to reduce Britain's government debt.

The new Italian government, which has not even taken office yet, is facing a similar learning curve. Italian voters may be ready for a change and prefer to give the hard right a chance, but Moody's (NYSE:MCO) warned last week that it would be watching closely for any sign of policies that delay economic reforms and would not hesitate to downgrade the bonds.

Fabio Panetta, a highly regarded economist who is currently on the ECB executive board, has reportedly turned down a request from Giorgia Meloni, the likely prime minister, to join her cabinet as finance minister. Meloni seems determined to put technocrats into key government posts to allay investor fears, but she's not there yet.

Yield on Italy's benchmark 10-year government bond settled above 4.6% in later Monday trading after getting near 4.8% earlier, compared to less than 4% in early September, when it became obvious the right-wing alliance was headed for victory in the Sept. 25 election.