Should we be afraid of central banks?

Many investors are afraid that monetary policies will become highly restrictive in order to fight inflation, and that this will lead to a sharp decline in equity markets. Indeed, if central banks behave d as they did in the past, they would now raise interest rates significantly, and long-term interest rates would also rise sharply. But there are many reasons why central banks are likely to be more cautious today than in the past, leading to much smaller rate hikes . These are: The high level of public debt ratios, hence the objective of maintaining debt sustainability; The high level of wealth, hence the need to avoid a sharp fall in asset prices (equities, real estate) which would trigger a drastic negative wealth effect; The emergence of objectives linked to the real economy: supporting employment to reduce inequalit y , boosting potential growth to facilitate deleveraging; The low indexation of wages to prices, which results in a decline in real wages and therefore in demand when inflation appears, leading to a spontaneous mechanism for stabilising inflation; Central banks’ determination to facilitate the energy transition; this requires very large investments with low financial returns, hence the need to keep long-term interest rates low as well; The understanding that if inflation is caused by negative supply shocks, then raising interest rates is an inappropriate response ; The difficulty of justifying a tighter monetary policy in the euro zone when economies will suffer from the war in Ukraine.