ADVERTISEMENT

Central Banks Preferring to Blast Through Ammo, Not Save It

Central Banks Preferring to Blast Through Ammo, Not Save It

(Bloomberg) --

The world’s central banks are starting to deploy a crisis-era lesson that it’s best to take out insurance against a recession than worry about running out of ammunition.

The Federal Reserve led a domino of central bank actions this week by slashing its benchmark interest rate a full percentage point to near zero and promising to boost its bond holdings, among other measures.

That was followed the world over as monetary authorities from Sweden to Japan and Australia to South Korea all took steps, many in emergency meetings. Among the actions: rate cuts, more asset purchases, market interventions, and new programs to keep banks lending and companies afloat.

Central Banks Preferring to Blast Through Ammo, Not Save It

“The lesson from the 2008-2009 financial crisis was to get to zero very quickly, both to ease lending conditions and to signal decisiveness, and the Fed applied that lesson,” said Torsten Slok, Deutsche Bank AG’s chief economist. “Holding on to bullets can be costly when there is uncertainty about the magnitude and duration of this negative economic shock.”

Morgan Stanley economists calculate the average interest rate globally is now 0.48%, below the level reached in the crisis and about half where it was in December.

The rush to go big, so soon, contrasts with the reaction of governments, which have been slower to act, despite being implored to do so by central bankers because fiscal policy -- from tax breaks for businesses to cash payments for consumers -- can be better targeted at the parts of the economy that need it.

Central bankers also have little option but to move fast given their core role as lenders of last resort and amid emerging of stress in funding markets. The Fed and five other central banks will use their swap lines to support the international supply of dollars.

Bloomberg Economics: Cutting China’s 2020 GDP Forecast to 1.4%

The policy makers have academia on their side. Research published last year by John Williams, the president of the New York Fed, contends that central banks should not conserve their ammunition when rates are near zero and economic threats arise.

In a July 2019 speech, Williams said his work shows that the Fed can magnify the impact of its limited interest rate ammunition by acting quickly. It can also enhance its monetary policy firepower by keeping rates lower for longer once they’ve been cut.

The rush to exhaust monetary policy early, though, is raising questions about their remaining firepower as the worst health crisis in more than a century makes a recession inevitable.

“There is nothing else left to do on the monetary side,” Adam Posen, who heads the Peterson Institute for International Economics in Washington and was a crisis-era U.K. policy maker, wrote in a note. “No one should expect that the monetary stimulus will fix things. It will help some, and may put a floor under inflation and interest rates. But fiscal stimulus and direct help for affected sectors is necessary to get recovery.”

While there’s doubt over how much monetary policy can achieve, officials say it’s no time for gradualism and they have the tool to do more if needed.

“Whether it’s coronavirus or something else, if downside risks for the economy and inflation increases, we will of course consider additional easing measures to address them” Bank of Japan Governor Haruhiko Kuroda said on Monday.

That means digging deeper into new terrain, or as Nomura Holdings Inc. economists led by Rob Subbaraman put it in a new report, unconventional becomes conventional. More liquidity measures, macroprudential tools and even more aggressive asset purchases are among their options.

Governments have a crisis-era role model, too.

Australia, which looks set to experience its first recession since 1991, is held up a poster-child for its response to the financial crisis when it deployed a combination of fiscal and monetary policy that helped it escape a recession.

The Treasury advised the government in Canberra at the time to “go hard, go early, go households.”

“We wanted to use our fiscal firepower to keep the economy going, not to restart it after it had stalled,” Andrew Charlton, who was chief economic adviser to then Prime Minister Kevin Rudd and is now director of consultancy AlphaBeta in Sydney.

©2020 Bloomberg L.P.