Markets Are Questioning Central Bank Relevance

Investors no longer need to imagine the day when a major central bank official goes all in on the need for extreme monetary stimulus, including even possibly buying equities, and markets yawn. That day came and went.

European Central Bank Governing Council member Olli Rehn told the Wall Street Journal on Thursday that policy makers should come up with an “impactful and significant” stimulus package at their next monetary policy meeting in September. Normally such a pronouncement would spark animal spirits, sending riskier assets flying higher and causing government bonds to crater on the prospect for faster growth and inflation. But instead, European equities fell, dragging the MSCI All-Country World Index to its lowest level since the start of June. Government bond yields in the euro zone and elsewhere continued their march lower. Taken together, the moves are a clear signal that the global economy may be too far along the path toward a recession for central banks to prevent it. Put another way, the central bank “put” may be a thing of the past. At this point, investors perceive central banks as doing little more than pushing on a string by lowering rates that are already near or at record lows. If negative interest rates — essentially paying borrowers to take out loans — haven’t stimulated the economy by now, pushing them further into negative territory isn’t likely to make any difference.