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Central Banks Are in Sync on Need for Fresh Stimulus

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07/21/2019 | 09:15am EDT

By Brian Blackstone

Central banks world-wide are poised to unleash some of the most aggressive monetary stimulus since the financial crisis a decade ago.

But the circumstances are different now, with policies aimed more at breathing life into decade-old expansions rather than at averting an economic collapse. And it is unclear whether the central bankers' depleted tools will be adequate.

"We see the economy as being in a good place and we're committed to using our tools to keep it there," Federal Reserve Chairman Jerome Powell told Congress July 10, indicating the U.S. central bank is ready to cut interest rates later this month.

The European Central Bank also sent a clear easing signal in the minutes of its June meeting, which said there was broad agreement among officials that they "needed to be ready and prepared" to reduce rates and resume asset purchases to provide more stimulus.

Already some central banks in the Asia-Pacific region have lowered rates this year, including Australia -- which has cut rates twice to 1% -- New Zealand, India, Malaysia and the Philippines. Central banks in Korea and Indonesia reduced rates last week, as did South Africa's.

"The uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside," Philip Lowe, Australia's central bank governor, said on July 2.

Mr. Powell and other Fed officials have noted the decadelong U.S. expansion remains solid but faces risks from slowing global growth and trade-policy uncertainty. Minutes of their June meeting pointed to signs of economic cooling, including weak shipments and orders of new capital goods, lower profit-growth forecasts from private-sector analysts, declines in manufacturing activity and soft U.S. export sales. A rate cut would be an attempt to prevent the outlook from worsening.

"What central banks are trying to do is get ahead of the curve. We have not seen a substantial deterioration in the economy," said Neil Shearing, chief economist at consulting firm Capital Economics.

But there are risks to this strategy. With policy rates already low in the U.S. and below zero in Japan and much of Europe, fresh stimulus could fuel destabilizing bubbles in housing and other assets. Negative rates hurt banks in Europe by forcing them to pay central banks to store surplus funds. And if recessions do hit, central banks would find themselves with less ammunition to support their economies.

It is also unclear how much more stimulus can be squeezed out of such policies. Dallas Fed President Robert Kaplan said in an interview last week that for all the concerns businesses are raising about the policy environment, "cost and availability of capital is not one of them."

And central banks have little influence over the uncertainties stemming from the U.K.'s planned departure from the European Union and the U.S.-China trade dispute.

"Although central banks are certainly worried about trade wars, hard Brexit, etc., what really concerns them is lack of firepower," said Kenneth Rogoff, an economics professor at Harvard University. "There is a strong easing bias given that the last thing any central bank wants to do is create a recession that they might not have the tools to adequately handle."

Another change from a decade ago is the lineup of top central bankers making the decisions. Mr. Powell has spent most of his 18 months as Fed chief unwinding the crisis- and recession-era stimulus measures of former Fed Chairman Ben Bernanke. International Monetary Fund Managing Director Christine Lagarde, who is poised to succeed ECB President Mario Draghi in November, will inherit any easing policies he launches before departing.

For now, fine-tuning rates may be enough. The global economy is slowing but doesn't appear to be near a recession or destabilizing crisis, and unemployment is quite low in most developed economies. Inflation has weakened below the 2% target that most large central banks consider optimal but the danger of outright price declines, known as deflation, appears remote.

Fed officials have signaled they are ready to lower their policy rate this month by a quarter percentage point from its current range between 2.25% and 2.5%, while indicating the potential for additional reductions. It would be the Fed's first rate cut since 2008.

Analysts expect the ECB to reduce its already negative policy rate by its September meeting, and they don't rule out a cut before then in light of data indicating Germany's economy, the largest in the eurozone, possibly contracted in the second quarter. It could also restart bond purchases after ending them last December.

"Central banks are doing their best to deal with the bad hand that they have been dealt," Claudio Borio, chief economist at the Bank for International Settlements, a Switzerland-based consortium of central banks, said in a recent interview.

"The room for further action is still there. It hasn't been exhausted by any means, but of course the longer you proceed along this path, the narrower the path will get," he said.

Write to Brian Blackstone at brian.blackstone@wsj.com

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