Bloomberg February 23, 2019
Just since December 2018, central banks have collectively
injected as much as $500 billion of liquidity to stabilize economic
conditions. The U.S. Federal Reserve has put interest rate increases on hold
and is contemplating a halt to its balance-sheet reduction plan. Other
central banks have taken similar actions, fueling a new phase of the
“everything bubble” as markets careen from December’s indiscriminate
selling to January’s indiscriminate buying.
The
monetary onslaught appears a reaction to financial factors -- falling
equity markets, rising credit spreads, increased volatility -- and a
perceived weakening of economic activity, primarily in Europe and China.
If they heeded Walter Bagehot’s oft-cited rule, central banks would act only as lenders of last resort
in times of financial crisis, lending without limit to solvent firms
against good collateral at high rates. Instead, they’ve become lenders
of first resort, expected to step in at any sign of problems. U.S.
central bankers are currently debating whether quantitative-easing
programs should be used purely in emergency situations or more
routinely.
Since 2008, the global economy has grown far too
dependent on huge central bank balance sheets and accommodative monetary
policy. The U.S. economic boom President Donald Trump loves to tout is
largely fake, engineered by artificial policy settings. Such dependence
is dangerous and, for various reasons, could well backfire.
For one thing, central banks are poor forecasters. GDP
growth, inflation and labor markets may prove more resilient than
feared, remaining at or above trend. Key risks, such as the trade dispute
between the U.S. and China, may recede. Financial markets and asset
prices have already recovered substantially. It’s possible that central
banks may be forced to make another U-turn to reduce the risk of
reflating asset price bubbles and overheating economies. This flip-flop
would be destabilizing and affect decisionmakers’ credibility.
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