Macroscope | We’ve entered a danger zone in central banking
Policy decisions by some of the world’s leading central banks are undermining confidence and fueling volatility in markets
For investors anxiously looking to central banks for reassurance amid the plethora of risks and vulnerabilities facing the global economy, this week’s policy meetings of the US Federal Reserve and the Bank of Japan (BoJ) are proving to be something of a disappointment.
While the Fed and the BoJ are moving in opposite directions - the US central bank raised interest rates in December andis now debating when to undertake a second rate hikewhile the BoJ is implementing a programme of aggressive quantitative easing (QE) - their policies have failed to live up to the expectations of investors.
For the Fed, the conduct of monetary policy has become more challenging over the past year
A combination of patchy US economic data in the first-half of this year, a series of worrying global developments ranging from the fallout from China’s economic slowdown to British voters’ decision to leave the European Union (EU) and, most importantly, the diminishing effectiveness and perverse consequences of central banks’ actions have turned monetary policy into a major source of volatility for markets.
The uncertainty is fuelled by investors’ belated, albeit grudging, recognition that central banks cannot and should not be, as the prominent economic adviser Mohamed El-Erian describes them, “the only game in town”.
As the International Monetary Fund (IMF) rightly noted in its economic update last week: “the effectiveness of [monetary] policy support would be enhanced by exploiting synergies among a range of policy tools, without leaving the entire [financial] stabilisation burden on the shoulders of central banks.”
Unfortunately, politicians the world over are reluctant to provide the necessary support, either because of opposition to structural reforms from vested interests or because of disagreements among politicians themselves about what needs to be done to restore investor confidence and underpin growth.