Why Fed, central banks should work together
Federal Reserve Board chairman Jerome Powell continues to come under pressure from US President Donald Trump, who now says interest rates and stimulus measures should match Beijing's moves during the trade war.
Federal Reserve Board chairman Jerome Powell continues to come under pressure from US President Donald Trump, who now says interest rates and stimulus measures should match Beijing's moves during the trade war. Photo: Getty Images/AFP
The clock is ticking louder for lower global interest rates. The US Federal Reserve may be stonewalling against another easing measure but it is not a question of if, but when interest rates are cut again. The Fed favours patience, but the longer central banks delay, the more peril the world faces.
and world equity markets are finally latching on. Rather than be overtaken by events, it's time for central banks to get ahead and signal their readiness to ease again.
Staying proactive is imperative but the major central banks remain deeply conflicted right now. Their natural instinct is to return policy to normal after 10 years of monetary overkill but major obstacles stand in the way. Aftershocks are still being felt from the 2008 crash, while the deepening US-China trade war poses a mounting threat to global wellbeing.
Economic confidence has taken a hard
knock, world trade is in retreat, global stability is being undermined and it's certainly not the right time for policymakers to sit on their hands. The central banks of the US, China, Europe and Japan should combine forces to stop the rot. If governments are at odds, then central banks must step in and begin the countdown for lower rates.
Certainly, the Fed needs to jump off the fence and re-engage effective policy. US employment conditions may be going through the roof, but the economy shows signs of wear and tear, with the trade war and growing political risks on Capitol Hill taking their toll.
Consumer optimism and business confidence are wavering and the economy is losing momentum. There is no domestic inflation threat to worry about so the Fed could make an early start, helping to procure a softer landing. Complacency is not an option any longer.
China could also afford to be more generous on monetary policy. Beijing sounds cautious about the scope for future rate cuts, but pressure to ease again will only intensify as trade war repercussions hurt the economy in a bigger way. A hard landing must be avoided at all costs. Safeguarding Beijing's 6-6.5 per cent 2019 growth target will require lower interest rates and extra liquidity boosts to make a difference.
Beijing could also tolerate some shortterm currency volatility, especially as inflation risks remain subdued. Exports need to get going again as much as the domestic economy. The renminbi's implied 7.0 ceiling versus the US dollar could be temporarily relaxed.
The European Central Bank must consider cutting rates again to boost recovery. The European economy is weakening, hard Brexit is a real risk and Germany is showing signs of deeper cracks in business activity. As the world's biggest exporter, Germany is a bellwether for global activity and the signs are worrying.
European political unity is fragmenting, raising important question marks about Brussels' capacity to deal with future economic crises. The ECB must act as the backstop of last resort, keeping monetary policy highly accommodative to help steady confidence. The weak euro-zone economies like Greece and Italy are still not out of the woods yet and need more support. Japan has no other option than to keep monetary policy in a super-easy mode. With fiscal policy battened down by Japan's eye-popping 250 per cent government debt-GDP ratio, deficit-spending boosts and income tax cuts are not viable options.
Bank of Japan governor Haruhiko Kuroda has said the decline in demand overseas presents a problem for Japan's economy, but claimed it should still expand moderately. Photo: Kyodo
The Bank of Japan will need to keep monetary policy on a super-loose setting for a long while yet, feeding in even lower interest rates and faster monetary expansion, while keeping the yen as competitive as possible. Japan's reflation will be the weak link in the global recovery chain.