Global Central Bankers Say Tighter Policy Is a Long Way OffScott Hamilton and Simon Kennedy
Global central bankers led by Federal Reserve officials said they are still a long way off from tightening monetary policy, seeking to calm investors unnerved by the Fed’s push toward curtailing bond-buying.
The comments, along with efforts by the People’s Bank of China to allay concern over a cash crunch, helped halt a slide in stocks after the Fed’s June 19 decision to outline a timetable for tapering quantitative easing. Bank of England Governor Mervyn King and European Central Bank Executive Board member Benoit Coeure today echoed Fed counterparts in saying policy will stay loose to safeguard economic expansion.
“Clearly the level of interest rates and the scale of asset purchases will have to be unwound and we must return to more normal conditions at some point,” King told lawmakers in London. “That point is not today.”
Also speaking in London, Coeure said euro-region economic growth will probably remain “weak” this year and there should be “no doubts that our ‘exit’ is distant.” In a speech in Berlin, ECB President Mario Draghi said the euro-area economy’s condition “still warrants an accommodative stance.”
The Europeans’ comments come a day after two regional Fed presidents emphasized that U.S. policy remains accommodative. Chairman Ben S. Bernanke last week said the Fed may start slowing the pace of bond buying later this year and end it entirely around mid-2014 if the economy gets on a path of sustainable growth. The Standard & Poor’s 500 Index fell 1.2 percent yesterday.
“The bottom line is that they’re driving home the point that there’s no exit yet,” said Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co. in New York. “Many economies can ill-afford higher interest rates.”
China’s central bank said today it will keep money-market rates at a “reasonable” level amid a cash squeeze which last week sent the nation’s overnight repurchase rate to a record.
The People’s Bank of China has provided liquidity to some financial institutions to stabilize money market rates and will use short-term liquidity operations and standing lending facility tools to ensure steady markets, according to a statement today. It also called on commercial banks to improve their liquidity management.
U.S. stocks rose, with the S&P 500 advancing 0.6 percent. In Europe, the Stoxx Europe 600 Index increased 1.4 percent. Stocks were also boosted by U.S. consumer confidence and new-home sales data that exceeded economists’ forecasts.
Richard Fisher, president of the Federal Reserve Bank of Dallas and a critic of the Fed’s easing policies, said yesterday that officials are talking about a “dialing back,” not an exit. Minneapolis Fed President Narayana Kocherlakota, who has called for easier policy, said the Fed must emphasize in its statement that policy will remain accommodative “for a considerable time” after the end of quantitative easing.
Their comments highlight the challenges the Fed confronts while seeking to lay out a strategy for curtailing the asset purchases that have pushed its balance sheet to a record $3.47 trillion. Neither Fisher nor Kocherlakota votes on policy this year, though they will vote in 2014.
Bernanke last week emphasized that decisions to alter the pace of asset purchases depend on the economy’s performance, and that the Fed has “no deterministic or fixed plan” to end them.
Fisher yesterday backed Bernanke’s message, saying he favors tapering the purchases if the economy makes the kind of progress officials forecast. King also defended the Fed chief, saying markets overreacted to his comments.
“Even in the U.S., what you’ve seen there is that they’re still providing more stimulus,” King said. “The rate at which they’re providing more stimulus may be about to suddenly taper, but they’re still providing more stimulus.”
King, who has been defeated in a push for more QE since February, also said that while recent data show that a U.K. recovery “is in sight,” it’s “too weak to be satisfactory.”
“We saw the developments in the last week or so in China,” King said. “These are really quite significant developments. The euro area still remains a tremendous problem. Until we know how these problems will work out, it seems impossible for us to judge the speed and the timing by which we may eventually get back to a more normal state.”
BOE policy maker Martin Weale agreed with King on the outlook for policy, saying the “process of unwinding quantitative easing is some way in the future.”
King’s cautious outlook came as he made his last appearance at the U.K. Parliament’s Treasury Select Committee before he retires at the end of the month. He will be replaced by Mark Carney on July 1.
Separately, the TSC published a paper by the BOE on negative interest rates, which it requested after the Monetary Policy Committee discussed the possibility of further rate cuts earlier this year.
In the paper, the BOE said while a negative rate remains an option, QE and credit-boosting programs are “more reliable tools for stimulating aggregate demand.” The benchmark interest rate has been at a record-low 0.5 percent since March 2009, while the BOE has bought 375 billion pounds ($579 billion) of government bonds since then.
It added that a cut in its benchmark rate remains an option that the MPC “will keep under review lest circumstances change in the future.”