Central bankers stymied as their normalisation window closes fast

But stubbornly low inflation, defective fiscal policy and systemic disruption in all its forms looks like it lulled them into a mistaken belief that they had more time.

The last few weeks are reinforcing the sense that the window is closing fast. Financial markets have gone from pricing in hikes to cuts.

What’s remarkable is just how fast it happened.

Jarring pivot

Setting the global tone was thejarring pivota little over a week ago by US Federal Reserve chairman Jerome Powell, who has transitioned in a little over five weeks from foreshadowing rate hikes this year to throwing them into question entirely.


Federal Reserve chairman Jerome Powell has transitioned in a little over five weeks from foreshadowing rate hikes this year to throwing them into question entirely. AL DRAGO

He blamed global economic “cross-currents” that could be “with us for a while”.

But it’s also worth noting that the retreat followed months of increasingly strident attacks by President Donald Trump, who has made no secret of his distain for the chairman’s previously hawkish stance.

A day later, the US government revealed the economy added 304,000 jobs in January – raising questions about whether Powell has been premature in flagging a long pause in rate increases.

Either way, it appears the US President has forgiven his chairman. The two dined at the White House on Monday – their first meeting since Powell became the Fed boss a year ago.

Since then, the rest of the world has given the impression of playing catchup, with each central bank pointing to its own set of specific concerns.

Reserve Bank governor Philip Lowe, who hasn’t moved the overnight cash rate since August 2016, when his predecessor Glenn Stevens cut it to 1.5 per cent, on Wednesday dropped his long-running guidance that the next move was likely to be up.

Some are predicting its next moves will be to cut the cash rate to 1 per cent, while the more bullish forecasters say it won’t touch rates now until the middle of next year.

The Bank of England was next, leaving its bank rate at 0.75 per cent.

But not beforegovernor Mark Carney issued the bank’s blackest outlook since 2009for the British economy, which he said is suffering tensions caused by the “fog of Brexit” – surely the world’s most stupefying self-inflicted crisis.

Just hours earlier, the Reserve Bank of India’s new governor Shaktikanta Das not only shifted his official policy stance down to “neutral” from “calibrated tightening”, he unexpectedly cut his policy rate by 25 basis points to 6.25 per cent.

Others sounding more tentative notes in the last 36 hours because of a deteriorating global outlook included the Brazilian, Ugandan, Romanian and Czech central banks, with others set to entrench the trend before the week is out.

Driving it all has been a deterioration in the global picture, led by Europe.

A flurry of weak indicators are overshadowing 2019, with the European Union now warning of “substantial” risks, including an Italian economy at risk of stalling and weaker momentum in Germany. Not to mention a hard Brexit.

Fresh signs out of the White Housethat a meeting between Trump and China’s President Xi Jinping is looking unlikely ahead of the March 1 tariff deadline are yet another reminder that the trade war lurks over everything.

A week to forget

“It has been a week that the global economy arguably would like to forget,” said Westpac economists Elliot Clark and Simon Murray.

“Not because of financial market price action but rather owing to the policy and political tensions that have come to light.”

Banished for now, it would seem, is much talk of low unemployment leading to a wages breakout that spurs inflation.

“We’re not seeing strong inflationary pressures, if any, emerge,” former Fed chair Janet Yellen told CNBC this week.

Inevitably the global monetary policy pause will reignite debate about whether we now live in a world of secular stagnation – or as University of NSW economist Richard Holden puts it, the problem of too much savings chasing too few profitable investment opportunities.

In such a world, easy money tends to stoke asset prices rather than productive investment.

So where does this all lead?

Another downturn or worse

For one thing, if there’s another downturn or worse – a full-blown crisis – central banks like the Reserve Bank will be joining the QE club, building up vast sums in financial assets from financial institutions to push down yields.

And once a central bank starts it becomes a near-impossible habit to kick if the experience of Japan, ECB and more recently the Fed and Swiss National Bank are any guide.

Albert Edwards at Societe General thinks the next recession will see core inflation indices turn negative in the US and Eurozone, leading to central bank “helicopter money”.

And perhaps even wilder, a negative US Funds rate. Edwards points out that the San Francisco Fed recently floated this idea, suggesting that had it gone below zero after 2009 the current normalisation would have been quicker.

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