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 Despite near-zero rates and $7 trillion of monetary stimulus
unleashed by central banks in major industrial economies, investment
and growth is stuck below pre-crisis levels and tepid demand is
hurting developing economies by depressing prices of their commodity
exports.
“Memo to the human race: you tried all this monetary policy stuff…
and at the end of the day it did not succeed in getting you back
where you need to be,” Paul Sheard, chief global economist for
Standard & Poor’s, told Reuters. Sheard suggested it might be time
for central banks to admit their interest rates are stuck at zero,
and for other policymakers to step up.
Essentially central bankers face a dilemma - either lean more on
politicians to do more to boost growth or embark on a new round of
experimentation.
Both come with risks and uncertain payoffs.
Calls by the International Monetary Fund and others for increased
spending on infrastructure, reforms that could open markets in Japan
and Europe, or outright fiscal stimulus in countries like Germany,
have produced little action since the 2008-2009 financial crisis. By
piling more pressure on governments, central banks risk not
accomplishing much and yet provoking a political backlash that could
threaten their independence.
More experimentation - such as negative interest rates or direct
financing of government spending - could deepen concerns that
central banks were straying further from their core competences.
Then there is the third, increasingly unappealing option: do more of
the same. The Bank of Japan and the European Central Bank continue
buying securities to spur more lending, while the Federal Reserve
and the Bank of England do have an option of resuming debt purchases
they wrapped up in 2014 and 2012.
Yet as the IMF noted, Japan and Europe are unlikely to grow any
faster without serious structural change.
In fact, Japan probably slipped back into recession last quarter
despite $1.50 trillion injected by the Bank of Japan into the
economy since April 2013.
In the United States, the Fed's quantitative easing - creating money
to buy securities and dramatically boost the reserves that banks
could lend on elsewhere - gets credit for stabilizing financial
conditions. But policymakers are not sure how much growth it
produced and what more could it accomplish.
“We put everything we could to work and (U.S. growth) is still just
slightly better than 2 percent… That is some sign the tools did not
have the potency we expect,” Atlanta Fed President Dennis Lockhart
told reporters following the U.S. central bank's Sept 16-17 policy
meeting.
While U.S. unemployment rate halved to just over 5 percent from its
recession peak in 2009, various studies estimate that quantitative
easing could take credit for only between a quarter of a percentage
point and 1.5 points of that decline.
The dramatic run-up in central banks' balance sheets also failed to
bring inflation back to levels considered healthy, with the Fed far
from its target and Japan and euro zone in or close to outright
deflation.
In theory, ample and cheap money should encourage borrowing,
spending and growth, but with households, businesses and governments
scaling back debt after the crisis, major economies did not follow
the script.
LESS BANG FOR THOSE BUCKS
With a sense that there is little bang for the buck left in
quantitative easing, the narrative is shifting from central bankers
as superheroes to one of central bankers as bystanders, or, at best,
in supporting roles.
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"There are excessive expectations about what central banks can do,"
ECB vice president Vitor Constancio told Reuters in an interview.
Europe's growth potential was weak due to a number of factors,
including a shrinking labor market, and monetary policy was
powerless in this respect, he said. "It is for other policy makers
to do their job."
ECB chief economist Peter Praet also pointed out that lifting rates
off the floor may be a challenge. "In some major economies, zero has
featured for longer than any other value of the policy rate before,"
he told a conference. "The economy may have just gotten too used to
that number."
Federal Reserve officials so far have stuck with the orthodox view
that the world's largest economy can generate enough demand and
investment to reach the Fed’s inflation and employment targets,
allowing them to coax interest rates higher regardless of the weak
conditions elsewhere.
But the Fed’s decision last month to delay a long-debated rate rise
suggests doubt creeping in. One Fed member even called for
“negative” interest rates – essentially taxing banks for holding
excess reserves to make them put idle money to work.
A fringe idea perhaps, but a sign central banks could venture even
deeper into the uncharted territory they entered with quantitative
easing.
Bank of England chief economist Andrew Haldane in a recent speech
said central bankers may need to accept that their good old days –
of adjusting interest rates to boost employment or contain inflation
– may be gone for good.
“That may require a rethink, a fairly fundamental one, of a number
of current central bank practices,” he said.
In a chronically low-growth world, central banks may have to break a
final taboo and simply begin printing money to finance government
spending, Steven Englander, Citi’s managing director for foreign
exchange, wrote in a recent paper.
“It directly injects purchasing power into the economy and will
increase activity or inflation or both,” he wrote, contrasting it
with quantitative easing that comes with no guarantee that new money
will lead to more spending.
Such policies, associated with past spells of runaway inflation, are
anathema to central bankers and could prove unpalatable to those who
already criticize the Fed and the ECB of overstepping their mandates
with "quasi fiscal" measures.
Yet with governments either unable or unwilling to lead the
pro-growth charge, the pressure on central banks is not going away
any time soon.
"We are unavoidably and inexorably being led to the question: how do
we get more growth?" Reserve Bank of Australia governor Glenn
Stevens said recently. "Reasonable people get this. They also know,
intuitively, that the kind of growth we want won't be delivered just
by central bank adjustments."
(Reporting by Howard Schneider in Washington, Balazs Koranyi in
Frankfurt, Leika Kihara in Tokyo, William Schomberg in London and
Ian Chua in Sydney; Editing by Tomasz Janowski)
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