Central Banks Will Keep Policies Unchanged -- for Now
With all the attention being devoted to the policy intentions and actions of President Donald Trump, there has been a lot less focus on this week’s four meetings at systemically important central banks -- the Bank of England, the Bank of Japan, the Federal Reserve and the European Central Bank (though that meeting doesn't involve monetary policy).
Here are the six things to know about what is likely to transpire and why.
- The general shift in policy attention away from central banks is understandable. After too many years of excessive reliance on unconventional monetary policies, the ability of these institutions to significantly move the economic needle now pales in comparison to what governments can do -- good and bad.
- Central banks are waiting, and hoping, for governments to get their policy act together. Most importantly, by pursuing pro-growth structural reforms and by deploying more active fiscal policy where there is room, governments can take a good part of the excessive policy burden off central banks. This would allow the gradual and orderly normalization of monetary policy, especially as the benefits of unconventional measures are dissipating and the risks of collateral damage and unintended consequences are rising.
- Central banks also know that governments, should they opt instead to pursue anti-growth economic policies such as protectionism and trade wars, can confront them with one of the most difficult policy challenges -- of having to counter stagflation, or the tricky combination of lower growth and higher inflation.
- Although they are likely to recognize a baseline shift in favor of a more comprehensive policy response, central banks attach a considerable uncertainty factor to the policy outlook. As a result, they are eager to maintain their policy options. With that comes a preference to err on the side of remaining too loose for too long rather than end up inadvertently tightening policy prematurely.
- All this speaks to the high likelihood that all central banks will keep their policies unchanged when their high-level committees meet this week. If there is a policy change -- and that is a big if -- it would come from the Bank of Japan, which has become uncomfortable with the extent that its interest rate targeting is being challenged by the generalized rise in yields on global government debt in advanced economies.
- The economic and policy signaling will also be watched closely. Here again, central banks will look to craft guidance that keeps their options open. Recognizing a slight improvement in economic conditions and the hope for beneficial government policies, they will mix encouragement for longer-term policy normalization with assurances that they are ready to go the other way if need be.
The central bank meetings this week are unlikely to be major market movers. Like the rest of us, the four institutions will be trying to determine whether, how and when other policy-making entities are likely to influence the economic and financial outlook.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Mohamed A. El-Erian at firstname.lastname@example.org
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