Can, will and should will central banks around the world (Fed, ECB, Asia) rescue the world economy from the politicians--again? David Wessel has details on The News Hub. Photos: Bloomberg/Bloomberg/Reuters.
With the global economy losing vigor and politicians on both sides of the Atlantic dithering, the world's central banks are—again—being called on to ride to the rescue. Will they? And do they have the power to revive global growth?
Global stock markets seem to think so. The prospect that the Federal Reserve and European Central Bank are preparing to do more has triggered stock-market rallies nearly everywhere except China in the past couple of days.
On Thursday, China's central bank lowered rates for the first time since 2008, following recent rate cuts in Australia, Brazil and India. Analysts took European Central Bank rhetoric this week as a signal it is likely to lower rates this summer, a step the ECB decided against Wednesday despite seeing "increased downside risks to the economic outlook." And while top Federal Reserve officials avoided making any promises, they made clear that they will at least discuss doing more when they convene June 19 and 20.
But the potency of the remaining monetary medicine—particularly in the U.S.—is very much in doubt.
Both Fed Chairman Ben Bernanke and ECB President Mario Draghi, are reluctant warriors. Both tried to put the onus on elected politicians to do more to bolster growth, reduce risks of banking panics and eliminate uncertainty about fiscal policies.
"Monetary policy is not a panacea," Mr. Bernanke told Congress Thursday. "I would be much more comfortable if Congress would take some of this burden from us," he said, almost begging lawmakers to act soon to cancel across-the-board spending cuts and tax increases due to hit at year-end and to agree to a longer-term deficit-reduction scheme.
Mr. Draghi, pressed by reporters Wednesday, argued, "I do not think it would be right for monetary policy to compensate for other institutions' lack of action."
Yet with the global economy slowing to the point where unemployment is likely to rise and with little developed-country inflation in sight, several private economists say central banks can and should do more. "I think they should [take action], although not necessarily in equal measure," said Bruce Kasman of J. P. Morgan Chase. "But I don't think you can look at central banks as having the kind of ammunition to turn this around."
In the past when global growth was so slow, he said, central banks have cut short-term interest rates by about two full percentage points. With ECB rates at 1% and U.S. and Japanese rates near zero, that's now impossible.
Outside Germany, there is a widespread sense that the ECB could cut rates and pursue unconventional policies to offset the effect of austerity and reforms in the euro zone—but that it is holding back to pressure politicians. "I find deeply frustrating the notion that the central banks are in a game with other authorities and don't want to act because it'll make it easier for others not to act," said Lewis Alexander of Nomura Securities in New York. "It's important for them to use the degrees of freedom they have. Europe does have a [shortage of] demand problem. It's hard to understand why they're not cutting rates now."
"The same logic applies to the Fed," Mr. Alexander said. "If I could wave a magic wand and do mortgage-finance reform or do the grand fiscal deal, I would. But given where we are in the political cycle, given the reality of those constraints, the responsible thing for the Fed to do is to use the tools it has to try to meet its objectives."
Both Mr. Bernanke and his No. 2, Janet Yellen, argue that the Fed's more than $2 trillion in asset purchases has given the U.S. economy a significant lift. Both argue that the Fed could do more, perhaps expanding purchases of long-term Treasury and mortgage-backed securities. (Admitting to impotence would shatter what little confidence remains.) But long-term rates are already so low—the yield on 10-year Treasurys is around 1.6% and 30-year fixed-rate mortgages are at 3.7%—it is unlikely that additional Fed asset-buying would have as much oomph as earlier moves. Columbia University's Michael Woodford and other academics say the Fed should vow to increase inflation—which would lower inflation-adjusted interest rates—but Mr. Bernanke and Ms. Yellen are firmly opposed to that.
The biggest effect of any additional Fed and ECB action might be to reassure consumers, businesses and investors that central bankers are on the case. The Fed has been more successful at unconventional monetary policy than the Bank of Japan was in its earlier attempts. One reason why may be that the Fed has taken care to reinforce its monetary moves with rhetorical conviction that it does and will use its power to avoid deflation or another economic disaster. Similarly, said Philip Suttle, chief economist for the Institute for International Finance, a coalition of big global banks, the impact of an aggressive ECB might be more to "stop panic" than to "juice demand."
In big emerging markets, where rates are well above zero and economies sturdier, conventional rate cuts are easier. "Emerging economies have room to act, and are acting. Perhaps more important than anything else, those measures have a conventional effect," Mr. Suttle said. "When they tighten it has the effect of slowing things, when they ease, it has the effect of speeding things up"
"At the margin," he added, "we've gone from relying on the emerging markets for three-quarters of incremental global demand to relying on them to provide it all. There's a question of whether they're willing to do more for the global economy," especially given inflationary pressures in some (India) and fears of a deteriorating trade deficit in others (China).
Write to David Wessel at [email protected]
