A Brief History of Central Bank Coordination as Debate Heats Up
Even as major central bankers say it’s too soon to respond to the economic fallout from the coronavirus, some economists are debating the need for rare coordinated monetary easing by the Federal Reserve and its key counterparts.
In an op-ed in Thursday’s Wall Street Journal, former Fed Governor Kevin Warsh called on U.S. policy makers to “lead the world’s central banks in taking immediate action” to protect their economies from the virus.
He proposed that the Fed announce a 25 basis-point interest rate cut, and encourage the People’s Bank of China, European Central Bank, Bank of England and Bank of Japan to “take appropriate simultaneous action to loosen monetary policy in their jurisdictions.”
For now, such a wave of stimulus remains unlikely. Fed Vice Chairman Rich Clarida and ECB President Christine Lagarde are among those saying it is premature to deliver fresh aid even as the virus’s economic threat mounts. The U.S. central bank is also in a different position from its euro-zone and Japanese counterparts, which still have negative rates and have never lifted them from their crisis settings.
“We like the idea and think it is a genuine possibility, but we would not underestimate the difficulties coordinating an international response at a time when each central bank faces tough internal debates over the time line for any decision and necessity or otherwise of monetary action,” said Krishna Guha, vice chairman at Evercore ISI and a former New York Fed official. “The most plausible scenario for an inter-meeting Fed move is one in which the Fed would be moving as part of a globally coordinated monetary easing, which would be confidence-enhancing.”
Central-bank coordination in times of turmoil has become the norm as this century has unfolded. One strand of that has been the creation of swap lines between monetary institutions, anchored by the Fed, to ensure an adequate supply of dollars to financial systems. While these were previously agreed on an ad-hoc basis, many have become effectively permanent. In recent years, the PBOC has increasingly sought to cement such relationships too.
The last time the main central banks united with specific action was in March 2011. That’s when Group of Seven members intervened in foreign-exchange markets to slow a surge in the yen that came about as Japanese repatriated savings from abroad following an earthquake and tsunami. That was the first currency intervention since 2000 when they acted together to stunt a decline by the fledging euro.
As for interest rates, the last coordinated cuts came in October 2008 as the collapse of Lehman Brothers Holdings Inc. plunged financial markets and the world economy into crisis. Outside of their schedule of normal meetings, the Fed and ECB led a group in reducing their benchmarks by half a percentage point. The BOJ didn’t participate, but supported the action.
The previous December, the Fed, ECB and others moved in concert to make liquidity available to banks amid what the Fed called “elevated pressures in short-term funding markets,” coordination that provided the basis for further moves during the turmoil that followed the next year.
In September 2001, major central banks, again led by the Fed, announced rate cuts by half a percentage point on the same day to ward off a global recession following the 9/11 attacks on the U.S.
None of those crisis moments have yet involved a health scare. For Mark Dowding at BlueBay Asset Management, an escalation in the current designation of the coronavirus outbreak could be decisive.
“The point of maximum bearishness may be reached in the next couple of weeks. Indeed, this could coincide with the moment that Covid19 is officially declared a pandemic,” he said. “Such a step could set the groundwork for the delivery of a coordinated global policy easing response.”
©2020 Bloomberg L.P.