Activism Shows Rise of Whatever-It-Takes Central Bankers
Call them the “whatever-it-takes” central bankers.
As the world’s advanced economies grow at half the speed of the pre-crisis years amid persistently high unemployment, governments are turning to a new set of monetary-policy makers who in word -- and they hope deed -- are more aggressive than their predecessors.
A revolution that began with the arrival in November 2011 of Mario Draghi at the European Central Bank now is gathering speed as Canada’s Mark Carney joins the Bank of England and the Bank of Japan awaits a new governor. The shift could culminate a year from now if Federal Reserve Chairman Ben S. Bernanke is succeeded by someone even bolder.
The changing of the guard reflects both a need for central banks to offset fiscal paralysis and a bet that monetary policy remains a potent force. At the same time, investors are increasingly weighing the costs and benefits of quantitative easing, while suggesting too much is expected of central banks.
The appointments of activists “reflect the case that economies are still struggling to sustain solid recoveries and there’s pressure from political quarters to be more stimulative,” said Nathan Sheets, a former adviser to Bernanke and now global head of international economics at Citigroup Inc. in New York. “Central banks have stuff in the bag, but it’s largely untried and may generate unwelcome side effects.”
The aggressiveness -- actual or anticipated -- already is affecting markets. The euro is up 9.5 percent against the dollar since Draghi’s July 26 vow to defend the single currency, and the yield on Spain’s 10-year bond has fallen more than two percentage points to 5.2 percent since July 24.
The Japanese yen is down about 15 percent compared with the dollar since mid-November in anticipation of new Prime Minister Shinzo Abe’s plans to refocus the Bank of Japan on beating deflation. U.K. inflation expectations are near the highest since April 2011 amid speculation that Carney, currently the Bank of Canada governor, will spur prices.
The promotion of policy makers who support stimulus encourages the recent pivot away from bonds and into riskier assets such as stocks, said Andrew Milligan, head of global strategy at Edinburgh-based Standard Life Investments Ltd. It also is forcing investors to consider ways to protect themselves against long-term price pressures through inflation-protected bonds and real estate, he said.
“Central bankers have begun to redefine what their role is, moving away from inflation targeting toward sustaining the health of the financial system, indeed the wider economy,” said Milligan. “New policy makers may bring in new tools, ones which global investors will need to understand quickly.”
The doors are rotating worldwide. Carney’s transfer creates a vacancy in Ottawa, and Glenn Stevens’s term at the Reserve Bank of Australia ends in September.
Among the major emerging markets, Sergey Ignatiev retires in June as chairman of Russia’s central bank, the tenure of India’s Duvvuri Subbarao ends in September and China is signaling it will replace Zhou Xiaochuan as soon as next month.
Recently published research from University of California- Berkeley economists Christina D. Romer and David H. Romer supports faith in monetary policy. They conclude that the Fed made its biggest mistakes during the Depression of the 1930s and inflation of the 1970s because officials doubted their true power.
Quantitative easing has had an impact, according to analysis at some central banks. Research by economists at the Fed last year estimated its first two rounds of asset purchases reduced unemployment by 1.5 percentage points and staved off deflation. The Bank of England estimated in July that 200 billion pounds ($311 billion) of bond buying between March 2009 and January 2010 raised gross domestic product by as much as 2 percent and inflation by 1.5 percentage points.
Bernanke’s own research as a Princeton University professor criticized Japanese policy makers in the 1990s for a reluctance “to try anything that isn’t absolutely guaranteed to work,” he said in a January 2000 paper.
The lesson is to keep pumping and be more innovative if needed, said Danny Gabay, a director of Fathom Consulting in London. He calculates that fiscal policy, the other main lever of economic management, was eased 15 times in Japan since 1997, to little avail.
“What we have now is a monetary problem, so it’s time for a monetary solution,” said Gabay, a former Bank of England official. “It’s tough to make monetary policy effective, but it’s the only way.”
The appeal for governments of appointing activists is that they have run out of room to ease fiscal policy and would prefer that central banks go for growth, even if it means a pickup in prices, said Rob Carnell, chief international economist at ING Group NV in London. Central bankers in some countries already are indicating a willingness to tolerate above-target inflation despite their mandates.
The International Monetary Fund last month cut its forecast for expansion in advanced economies this year to 1.4 percent, down from an October estimate of 1.5 percent and half the average rate of 1994 to 2003.
The Washington-based lender also predicts the average inflation rate in these nations will remain less than 2 percent through 2017 and unemployment will top 8 percent this year. It sees the average budget deficit at 4.9 percent of GDP.
“Governments think they don’t need to worry about inflation and wouldn’t even mind if some came along, so they’re putting people in who share that cause,” Carnell said. “It’s all about growth.”
The biggest change in behavior probably is coming in Japan, where Abe is seeking allies at the central bank for aggressive monetary easing in an economy plagued by deflation and repeated recession.
Governor Masaaki Shirakawa, 63, steps down March 19 amid criticism from lawmakers he’s not done enough to spur prices. While he agreed last month to a 2 percent inflation target and pledged to start open-ended asset purchases next year, Shirakawa also has argued that ending deflation isn’t something the bank can do on its own and warned against keeping interest rates too low for too long, lest they fan asset bubbles.
Potential replacements include Asian Development Bank President Haruhiko Kuroda; former BOJ Deputy Governor Kazumasa Iwata; Toshiro Muto, another ex-deputy; and Gakushuin University professor Kikuo Iwata.
Abe, whose two-month-old government has earmarked ending deflation as central to its economic ambitions, says he wants the BOJ to take responsibility for the new inflation goal. One option is to expand the money supply by targeting cash that lenders have at the central bank, increasing the so-called current-account holdings, which were 38.2 trillion yen ($410 billion) as of Feb. 12.
Other potential strategies include buying more corporate bonds, commercial paper, real-estate investment trusts and exchange-traded funds. The bank also could lend to a special vehicle for purchasing foreign bonds and reduce the 0.1 percent interest rate it pays on excess reserves it holds for lenders.
“With such actions, yields at longer maturities will flatten further and spur growth, helping to make a very favorable environment for the economy’s improvement,” said Mikihiro Matsuoka, chief Japan economist at Deutsche Securities Inc. in Tokyo.
“Companies and households will be encouraged to spend this year rather than waiting until next year, while tax revenues will surge and help the government’s finances.”
In the U.K., Carney, 47, will take over from Mervyn King, 64, in July. He’s prefaced his arrival from Canada by declaring that central banks aren’t “maxed out” and should focus on delivering “escape velocity” for their economies. He also says officials facing above-target inflation have room to be flexible. While he’s damped speculation he favors an overhaul of the British monetary regime, he’s indicated support for guiding investors on probable time frames for easy policy.
By contrast, King has questioned how much more monetary policy can achieve, arguing it is no “panacea.” He’s also noted investors have renewed “the search for yield,” questioned policy guidance and wants the government to boost the supply side of the economy.
Activism already is paying dividends for the euro area. Draghi, 65, broke with predecessor Jean-Claude Trichet, 70, by pursuing a more forceful campaign to end the euro-region debt crisis, declaring there aren’t “any taboos” at the ECB.
Draghi put down an early marker in November 2011 by defying his own staff to back an interest-rate cut at his first policy meeting as president. He would go on to reduce borrowing costs twice more to a record-low 0.75 percent, as well as offer banks cheap three-year loans.
Most famously, he pledged last July to do “whatever it takes” to protect the euro from the regional debt crisis and followed up two months later with a plan to buy the bonds of governments that agree to austerity commitments.
“Draghi has been much more proactive,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Trichet was more inclined to be conservative and believe central banks were just there for inflation and needed to avoid moral hazard.”
The new era may extend to the U.S., even though Bernanke, 59, has attracted plaudits and brickbats for his own action, which includes more than $2 trillion in emergency aid, three rounds of asset purchases, record-low interest rates and now thresholds for the reversal of stimulus. The Fed’s balance sheet has more than tripled on his watch, and its current bond-buying has no limit on size or length.
Still, his second term ends in January, and former colleagues say it isn’t likely he’ll want to stay. Janet Yellen, 66, the Fed’s vice chairman, is a potential successor. JPMorgan Chase & Co. economists rank her as among the most dovish of 19 Fed officials, with Bernanke in the center.
She has disagreed with colleagues who say the Fed can’t help create jobs with accommodative policy and argued it should accept somewhat more inflation to do so. In a Feb. 12 speech, she signaled stimulus may outlast the Fed’s bond purchases, saying the central bank could hold the federal funds rate near zero even after reaching its near-term economic targets.
“It certainly seems Yellen’s public comments are more dovish” than Bernanke’s, said Michael Feroli, chief U.S. economist at JPMorgan in New York and a former Fed economist. “She is more strident in defending aggressively easy monetary policy, and she has been earlier in advocating the aggressive actions subsequently taken.”
While “not a shoo-in,” Yellen is “the most likely candidate” to succeed Bernanke, said Joseph Gagnon, a former associate director of the Fed’s Division of International Finance who is now at the Peterson Institute for International Economics.
Even with the best of intentions, any new stimulus may struggle to gain traction, said Andrew Sentance, a former Bank of England policy maker.
“There must be a limit on whether monetary policies can actually deliver growth over the medium term,” said Sentance, now a senior economic adviser at PricewaterhouseCoopers LLC in London.
Stephen Cecchetti, head of the monetary and economic department at the Bank for International Settlements in Basel, Switzerland, says the focus should be on governments improving the structure of their economies to raise long-term growth rates.
“This is not the province of central banks,” he said in a telephone interview.
The bigger risk is that easy monetary policy begins to hurt more than help. That could happen if it reduces incentives for governments and households to cut debt, props up so-called zombie companies and undermines bank profits and pensions. It also could encourage excess risk-taking -- as Bernanke and King have acknowledged -- or fuel the potential for a currency war in which countries all chase weaker exchange rates.
“History suggests that central-bank intervention may make things worse in the long run rather than better,” Albert Edwards, global strategist at Societe Generale SA in London, said in a Feb. 8 report.
The ambition of politicians also has stoked concern the lines between fiscal and monetary policy are blurring, threatening central banks’ independence and provoking suggestions they may end up helping to finance government debt.
Still, Julian Callow, chief international economist at Barclays Plc in London, says it’s unfair to criticize the outgoing crop of central bankers too much, given they were unorthodox, too, in cutting rates, buying assets and boosting balance sheets.
“There can be differences of nuance that emerge with changing personnel, but frankly, policy reflects the environment,” said Callow, a former Bank of England economist. “The longer post-crisis weakness persists, the more central banks have to keep renewing and rethinking their strategy.”
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