Central banks try to avoid buzz kill as they pull punchbowl away
washington — The world’s major central banks are declaring last orders at the punchbowl.
The Federal Reserve — which has been raising interest rates since 2015 — takes the next step towards normalising monetary policy this month when it starts to reduce its $4.5 trillion balance sheet. The European Central Bank is expected to soon lay out its own plans for cutting asset purchases, possibly followed by a rate increase by the Bank of England in November. The Bank of Canada has already raised borrowing costs.
The trick for policy makers gathering this week in Washington for the semi-annual meeting of the International Monetary Fund is to scale back their support without hurting the global economy by upsetting financial markets that have been juiced by monetary largesse for years.
It’s “the end of an era,” Ray Dalio, who leads the world’s largest hedge fund at Bridgewater Associates, said in a September 21 report for clients. The world economy and the markets are “entering a more dangerous time,” he co-wrote in the report, according to a money manager who’s seen it.
Compounding the difficulty: uncertainty over who’ll lead the world’s most powerful central bank, with Vice Chairman Stanley Fischer about to step down and Chair Janet Yellen’s term expiring in February.
“There is at least a risk that we see some unravelling in the markets” as central banks exit from quantitative easing, said Joachim Fels, a global economic adviser of Pacific Investment Management Co.
For now at least, all looks well on the economic front. The global expansion is coming off its best quarter since 2010 and the underlying momentum looks strong, Bruce
We don’t have to raise interest rates just because they’re going up elsewhere overseas Haruhiko Kuroda, Governor of Bank of Japan
Kasman and his fellow economists at JPMorgan Chase & Co said in a September 29 report.
“It feels like the global economy is in something close to a synchronous upturn” for the first time in years, said David Stockton, a former Fed official who is now a senior fellow at the Peterson Institute for International Economics in Washington.
Central bankers are moving to take advantage — even with inflation below their targets. Bloomberg Intelligence chief economist Michael McDonough sees net asset purchases by the central banks falling to a monthly $33 billion at the end of 2018, from $131 billion in September.
Interest rates also are going up in some countries. Both the Fed and the Bank of Canada have boosted rates twice in 2017 and US policy makers have penciled in one more increase before year-end.
Not every central bank is turning to tightening, of course.
The People’s Bank of China, whose benchmark interest rate remains at a record low, is balancing a push to slow overall credit growth without hurting the economy. Japan is nowhere close to curbing its monetary support and Australian and South Korean rates also remain at lows.
“We don’t have to raise interest rates just because they’re going up elsewhere overseas,” Bank of Japan Governor Haruhiko Kuroda told reporters last month.
Those policy makers who are moving are doing so gingerly. The Fed’s plan to pare its balance sheet has been months in the making and starts off with asset reductions of just $10 billion per month. ECB President Mario Draghi has stressed that any change in policy will be gradual and ensure significant monetary support remains. — Bloomberg