Risks are mounting that the world is shifting to a regime of higher inflation, forcing central bankers to tear up their playbook of the last 20 years.

That was a key message from Federal Reserve Chair Jerome Powell and his European counterparts on Wednesday as they debated how to tackle persistent price pressures and slower growth.

“I don’t think we are going to go back to that environment of low inflation,” European Central Bank President Christine Lagarde told the ECB’s annual forum in Sintra, Portugal.

“There are forces that have been unleashed as a result of the pandemic, as a result of this massive geopolitical shock we are facing now that are going to change the picture and the landscape within which we operate,” she said during a 90-minute panel discussion moderated by Bloomberg Television’s Francine Lacqua.

Her comments, alongside those of Powell and Bank of England Governor Andrew Bailey, mean a potential upheaval of monetary policy practice. For years, the critical foe facing central bankers was too-low inflation -- pushing them to deploy near-zero interest rates and massive bond purchases to lift their economies during recessions and feeble recoveries.

The common enemy now is sizzling price pressures, which have surged to 40-year highs in the US as pandemic-tangled supply chains and Russia’s invasion of Ukraine sink predictions they will prove fleeting, forcing central bankers to hit the brakes: The Fed raised interest rates by 75 basis points this month -- the largest increase since 1994 -- and signaled it could do the same in July.

For Powell and his colleagues, a conclusion that underlying inflation is at risk of drifting higher and becoming unmoored from the Fed’s 2% target could spell an even-more aggressive policy pivot than suggested by their June forecast.

That outlook -- which already shows the most hawkish Fed action since the 1990s, projects rates rising another 175 basis points this year and peaking between 3.75% and 4% in 2023. The following year, however, officials pencil in modest rate cuts as growth moderates and inflation turns back toward target.

Policy makers “are saying there is going to be some pain and we may not get the soft landing we want, but having this high inflation and high inflation expectations is worse,” said Derek Tang, an economist at LH Meyer in Washington. “This is a major shift” and may forestall rate cuts in 2024.

JPMorgan Chase & Co. economists Bruce Kasman and Joseph Lupton said that the still expected central banks to be sensitive to growth with the Fed eventually stopping rate hikes at 3%, the BOE at 2% and the ECB at 1%. 

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