Central Banks Are in Sync on Need for Fresh Stimulus
July 21 2019 - 9:29AM
Dow Jones News
By Brian Blackstone
Central banks world-wide are poised to unleash some of the most
aggressive monetary stimulus since the financial crisis a decade
ago.
But the circumstances are different now, with policies aimed
more at breathing life into decade-old expansions rather than at
averting an economic collapse. And it is unclear whether the
central bankers' depleted tools will be adequate.
"We see the economy as being in a good place and we're committed
to using our tools to keep it there," Federal Reserve Chairman
Jerome Powell told Congress July 10, indicating the U.S. central
bank is ready to cut interest rates later this month.
The European Central Bank also sent a clear easing signal in the
minutes of its June meeting, which said there was broad agreement
among officials that they "needed to be ready and prepared" to
reduce rates and resume asset purchases to provide more
stimulus.
Already some central banks in the Asia-Pacific region have
lowered rates this year, including Australia -- which has cut rates
twice to 1% -- New Zealand, India, Malaysia and the Philippines.
Central banks in Korea and Indonesia reduced rates last week, as
did South Africa's.
"The uncertainty generated by the trade and technology disputes
is affecting investment and means that the risks to the global
economy are tilted to the downside," Philip Lowe, Australia's
central bank governor, said on July 2.
Mr. Powell and other Fed officials have noted the decadelong
U.S. expansion remains solid but faces risks from slowing global
growth and trade-policy uncertainty. Minutes of their June meeting
pointed to signs of economic cooling, including weak shipments and
orders of new capital goods, lower profit-growth forecasts from
private-sector analysts, declines in manufacturing activity and
soft U.S. export sales. A rate cut would be an attempt to prevent
the outlook from worsening.
"What central banks are trying to do is get ahead of the curve.
We have not seen a substantial deterioration in the economy," said
Neil Shearing, chief economist at consulting firm Capital
Economics.
But there are risks to this strategy. With policy rates already
low in the U.S. and below zero in Japan and much of Europe, fresh
stimulus could fuel destabilizing bubbles in housing and other
assets. Negative rates hurt banks in Europe by forcing them to pay
central banks to store surplus funds. And if recessions do hit,
central banks would find themselves with less ammunition to support
their economies.
It is also unclear how much more stimulus can be squeezed out of
such policies. Dallas Fed President Robert Kaplan said in an
interview last week that for all the concerns businesses are
raising about the policy environment, "cost and availability of
capital is not one of them."
And central banks have little influence over the uncertainties
stemming from the U.K.'s planned departure from the European Union
and the U.S.-China trade dispute.
"Although central banks are certainly worried about trade wars,
hard Brexit, etc., what really concerns them is lack of firepower,"
said Kenneth Rogoff, an economics professor at Harvard University.
"There is a strong easing bias given that the last thing any
central bank wants to do is create a recession that they might not
have the tools to adequately handle."
Another change from a decade ago is the lineup of top central
bankers making the decisions. Mr. Powell has spent most of his 18
months as Fed chief unwinding the crisis- and recession-era
stimulus measures of former Fed Chairman Ben Bernanke.
International Monetary Fund Managing Director Christine Lagarde,
who is poised to succeed ECB President Mario Draghi in November,
will inherit any easing policies he launches before departing.
For now, fine-tuning rates may be enough. The global economy is
slowing but doesn't appear to be near a recession or destabilizing
crisis, and unemployment is quite low in most developed economies.
Inflation has weakened below the 2% target that most large central
banks consider optimal but the danger of outright price declines,
known as deflation, appears remote.
Fed officials have signaled they are ready to lower their policy
rate this month by a quarter percentage point from its current
range between 2.25% and 2.5%, while indicating the potential for
additional reductions. It would be the Fed's first rate cut since
2008.
Analysts expect the ECB to reduce its already negative policy
rate by its September meeting, and they don't rule out a cut before
then in light of data indicating Germany's economy, the largest in
the eurozone, possibly contracted in the second quarter. It could
also restart bond purchases after ending them last December.
"Central banks are doing their best to deal with the bad hand
that they have been dealt," Claudio Borio, chief economist at the
Bank for International Settlements, a Switzerland-based consortium
of central banks, said in a recent interview.
"The room for further action is still there. It hasn't been
exhausted by any means, but of course the longer you proceed along
this path, the narrower the path will get," he said.
Write to Brian Blackstone at brian.blackstone@wsj.com
(END) Dow Jones Newswires
July 21, 2019 09:14 ET (13:14 GMT)
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