Central bankers readying to fight another downturn

Bloomberg

Central bankers readying to fight another economic downturn are tossing hand grenades rather than firing bazookas.
Federal Reserve Chairman Jerome Powell and European Central Bank President Mario Draghi stand ready alongside many of their counterparts to cut interest rates to bolster the weakest growth in a decade and lackluster inflation. Yet they have little to work with and, perhaps more worryingly, what they do have lacks potency.
Expansions and price growth are flagging despite the easy money already sloshing around and further stimulus may do little to offset the trade war. Structural obstacles such as rising debt burdens, digital disruption and aging populations also work against looser monetary policy.
“There are limits on what further monetary easing can achieve,” Reserve Bank of Australia Governor Philip Lowe said. “You still get benefit from it, but there are limits.”
Political pressure is mounting on central banks to do more, led by a string of attacks by President Donald Trump on the Fed.
Investors are also pressuring central banks to act while expressing concern about what they can achieve. $13 trillion of bonds now boast yields below zero, yet monetary-policy impotence was a major worry of money managers surveyed last month by Bank of America Corp.
“Cutting rates now makes sense given the softening activity,” said Janet Henry, chief economist at HSBC Holdings Plc. “No central banker wants to be held responsible for failing to be nimble enough to prevent an expansion from coming to a halt.”
While Henry warns there is a risk of inflating asset bubbles, Ethan Harris, head of global economics research at Bank of America Corp, said an advantage of easing now is to avoid a slump in markets which would drag down growth.
Central bankers maintain they are up to the challenge.
Powell told US lawmakers that the US economy is “in a very good place” and central-bank officials want “to use our tools to keep it there.”
Draghi said last month that failing to act would mean “resignation, acceptance of defeat.” Bank of Japan Governor Haruhiko Kuroda recently told Bloomberg News he can deliver more big stimulus if necessary.
But more than 700 rate cuts worldwide over the past decade mean benchmarks are already around historical lows and there’s not much conventional ammunition left. The Fed’s benchmark, for example, is half the level it was at prior to past downturns.
Central bankers from the world’s biggest industrial economies will meet finance ministers this week at a Group of Seven summit in France, where the slowing world economy will likely dominate their discussions.
Elsewhere this week, South Korea, South Africa, Ukraine and Indonesia may become the latest emerging markets to cut rates.