Macroscope | The Federal Reserve’s worrying slide from villain to pushover
- Nicholas Spiro says the rise of populism and protectionism has made central banks’ jobs a lot harder. US Federal Reserve chairman Jerome Powell has just signalled a dovish tilt, and is being accused of caving in to financial markets
While investors have been hanging on central bankers’ every word since the 2008 financial crisis, as successive rounds of quantitative easing boosted asset prices and suppressed volatility, Powell faces intense scrutiny. Not only is the Fed the world’s most influential central bank, it is the most advanced among its main peers in normalising monetary policy in the face of a slowdown in the global economy.
Meanwhile, the European Central Bank is in an even tougher spot. Last week, Mario Draghi, the ECB’s president, failed to provide a credible explanation as to why it ended its quantitative easing programme last December – and is still keeping open the option of raising rates later this year – when growth in the euro zone has dropped to a 5½-year low, with manufacturing output in Germany, the bloc’s largest economy, in contraction territory. Many investors fear a policy mistake is brewing.
Yet while the big central banks have become a source of intense volatility as the withdrawal of stimulus has gathered pace in the past year, much of the recent turbulence in markets stems from factors beyond their control.