Central Banks Drop Their Bazookas
Policy makers have largely signaled their exhaustion with low- and negative-rate policies; Fed leads the pack higher
By JON HILSENRATH
Biography
Jan. 16, 2017 5:00 a.m. ET
An epoch of exceptional monetary stimulus is drawing to a close.
Central banks have exhausted themselves in their efforts to spur economic growth with low—even negative—short-term interest rates and bond-purchase programs meant to drive financial-asset prices higher.
Now, a range of forces—including political blowback, whiffs of inflation, stirrings of fiscal stimulus, receding unemployment and worries that the policies themselves may backfire—are pressing them to push short-term interest rates no lower.
The Federal Reserve is the first mover in this shift. It has nudged up short-term interest rates in two quarter-percentage-point increments in a little more than a year and penciled in three more moves in 2017. If all goes according to plan, its benchmark interest rate will rest at 1.375% by year-end, a level not seen in the U.S. since before Lehman Brothers collapsed in September 2008.
Anticipating the shift, investors have already pushed long-term interest rates higher. Yields on 10-year U.S. Treasury notes have jumped from 1.37% in July to near 2.5%.
The election of Donald Trump is a potential turning point for the Fed. Mr. Trump’s attacks on elites included the U.S. central bank. His promises of tax cuts and infrastructure spending could charge up the U.S. economy, leaving it less dependent on low rates to spur growth.
Fed officials are watching cautiously to see how he proceeds. “It is far too early to know how these policies will unfold,” Fed Chairwoman Janet Yellen said in December.
But she has seen enough progress in the real economy to get started moving rates up. The jobless rate, at 4.7% in December, is low enough to suggest slack in the job market is receding. Wages have started rising and inflation is not far from the Fed’s 2% target.
For Ms. Yellen herself, this could be her last year in office. Mr. Trump during the election said he would probably replace her when her term ends early next year.
Elsewhere in the world, central banks have signaled exhaustion with low rate policies.
“I’m not a fan of negative interest rates,” Mark Carney, governor of the Bank of England, said in August. “We see the negative consequences of them through the financial system; we’ve seen that in other jurisdictions; we see the issues with savers.”
The U.K. economy was expected to slow after the public decided in the summer to leave the European Union. The slowdown didn’t materialize and by November policy makers ditched plans to cut rates further. The U.K. central bank now needs to mind a sharp fall in the pound, which is expected to propel inflation above the BOE’s 2% annual target by the middle of the year.
European Central Bank officials have prolonged an asset-purchase program, also known as quantitative easing, by nine months, through the end of 2017. However, they will reduce the monthly volume of purchases to €60 billion ($63 billion) from €80 billion after March.
They, too, have grown squeamish about pushing short-term rates, already negative, any lower. Eurozone inflation, at 1.1%, rose at its fastest pace in three years in December, a sign that monetary stimulus in continental Europe may becoming less urgently needed.
In Asia, additional easing by the Bank of Japan is off the table for now, while the People’s Bank of China is trying to balance its need for growth against a credit-induced property boom that makes officials wary of pushing rates much lower. Everywhere outside the U.S.—including Japan and China—downward pressure on currencies is an added form of stimulus that makes lower interest rates less compelling.
The low-rate epoch didn’t deliver fast economic growth. In the advanced economies that championed the policies, economic output has expanded at a rate at or below 2% for six straight years and will do so again in 2017, estimates the International Monetary Fund.
Critics say the policies distorted financial markets while punishing savers and banks. Central bankers said they had no choice in the wake of the 2007-09 financial crisis, given the deflationary forces it unleashed.
Now policy makers dive into a new era—led by the Fed and a new Trump administration—when they test whether there is an alternate path to prosperity.
http://www.wsj.com/articles/central-banks-drop-their-bazookas-1484560802
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David Shulman11 hours ago
As I noted earlier this month the doves are becoming hawks. See shulmaven.blogspot.com
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Michael Lucks16 hours ago
Like the stimulus metaphor; drop the bazookas...
Pick up the short-barrels for a little domestic protection from home(land) invasion.
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Paul R. Wisgerhof18 hours ago
The Fed has no record whatsoever of being ahead of the curve when it comes to the U.S., let alone the world, economy. In 2017 inflation with outrun their projections. They are almost as successful in managing the economy as the environments are in controlling our climate.
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Yi Pan20 hours ago
They will print the money, it's all they know how to do. (why would you do anything else if you could hit a couple of buttons on a computer terminal and create 1 Trillion dollars? JJP)
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Frank Anderson1 day ago
The sooner that Trump gets rid of the yapping yellen and replaces her with a competent, "real world" leader, the better for all concerned.
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Tommy Butler1 day ago
Central Banks have historically dealt with national debt by debasing the currency. Only the economic theory changes for its justification.
Thus, it has been, and thus it shall always be. The temptation of self-regarded "financial experts" to apply a monetary bandaid is just too great.
The rest of us are just the victims of some Central Banker's hubris. End the Fed.
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John Gower1 day ago
I wonder how much damage they've already done? It seems to me this is only the first chapter, before the withdrawal symptoms set in.
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Michael Lucks16 hours ago
@John Gower
How much damage?
wsj.com
(just drop out the unreliable China and Greece type stats)
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alessio calcagno2 days ago
Central bankers said they had no choice? There always a choice.
As Janet does, we tend to forget that the free-market is a profit & LOSS system. The LOSS part is very important because it takes away the inefficiencies and misallocation of resources. It costs a lot in the short-term (people lose jobs and they need to re-training) but it is good in the medium term.
The asset bubble (shares, bonds, real estates) that the central banks have created, has now reached new highs with Trump's twitting powers. It is not going to end well...
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Douglas Johnston2 days ago
So, how does this work? What does the fed do about the trillions on their balance sheet from U.S. issued debt derived from Quantitative Easing (economic elite speak for printing money). If they wait to dispose of that asset as interest rates move up then the value of the asset declines markedly. If it sells where to the proceeds go? Do they go to the U.S. Treasury? Or, does the Fed benefit directly. Is the Fed an agent for the US Treasury in such a transaction?
I asked my congressman but he has no clue. (No one has ever done a comprehensive audit of the FED balance sheet and a multiyear review of their statement of cash flows etc. and no one publishes a list of who owns the 300 class A shares in the FED ...JJP)
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David Bircher1 day ago
@Douglas Johnston At the end of the year the Federal Reserve Bank sends all surplus income back to the US Treasury. So when the bonds come due the Treasury sends the money to the Federal Reserve Bank then the Fed sends any surplus back to the Treasury. This year the Bank sent over 97 trillion dollars to the Treasury.
federalreserve.gov
(so now the Federal Reserve, an independant Central Bank, commingals funds with the US Treasury.... It did not use to work that way, was what I was taught JJP)
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Michael Lucks16 hours ago
@Douglas Johnston
DJ: You must be from Pennsylvania.
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Michael Lucks16 hours ago
@David Bircher @Douglas Johnston
DB: $97 Billion
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David Bircher13 hours ago
@Michael Lucks @David Bircher @Douglas Johnston OOPS! Right Mr Lucks.
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Michael Lucks12 hours ago
@David Bircher @Michael Lucks @Douglas Johnston
typos are a pain
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Christopher Hanks2 days ago
Janet used to have bazookas?
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GEORGE CAMBRON2 days ago
Central bank balance sheets have exploded in the last ten years. The FED's balance sheet grew by 400% and is now about 25% of GDP. The ECB is worse, at about 35% of their GDP. Japan gets the prize; it's balance sheet is about 90% of their GDP. While it's easy to print money and buy assets, it may be much harder to sell them. The ECB and BOJ bought corporate bonds and so when the bonds mature the corporations will have to come up with cash to redeem them, unless the banks roll them over, making the banks permanent owners of the corporations. State owned businesses tend not to compete well, but that's where we are.
As for the FED, if they allow US bonds to expire more will have to be issued in the market, driving prices down and rates up. I haven't seen a convincing explanation of how we get out of this box we have wandered into, but am very interested in a cogent explanation.
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Suzanne Fournier2 days ago
See also
The Lady and the Trump( edgeandodds.com |
