Central bank governors are gathering at the fishing resort of Jackson Hole in Wyoming to discuss how they can dig themselves out of the monetary hole caused by the 2008 financial crash.
The central banks have cut interest rates to zero and beyond, they have pumped trillions of dollars into the global financial system and devised novel ways to make sure most of the money is used to cut the cost of credit to ordinary consumers and businesses.
The aim has been to boost growth and jobs at a time when governments of all colours have refused to ditch their austerity programmes and support productivity enhancing investment.
Before the conference, deputy US Federal Reserve governor, Stanley Fischer, said monetary policy was not equipped to boost productivity growth. But governments have ignored the pleas of central bankers,leaving Fed boss Janet Yellen, the Bank of England’s Mark Carney, Mario Draghi at the European Central Bank and Haruhiko Kuroda at the Bank of Japan to carry the burden.
In Jackson Hole, Yellen, Carney’s deputy Nemat Shafik and many others will debate how to piece back together the monetary system so it bears some resemblance to the one that existed before the crash. Under the title Designing Resilient Monetary Policy Frameworks for the Future, attendees will discuss the hurdles they must leap before they can achieve their stated aim. These include:
Markets addicted to low rates
Financial markets sank like a stone in the summer of 2013 when the Fed, believing the world had recovered from the Greek crisis the year before, hinted that it would begin to tighten monetary policy. The so-called “taper tantrum” revealed that several major economies, including Turkey and Brazil, were still addicted to cheap debt after borrowing heavily in the US currency. They faced crippling interest bills if dollar interest rates went up.
Last year the Fed was poised to try again but this was scuppered after the Chinese authorities bungled a depreciation of the yuan, triggering a stock market plunge. Such was the severity of the market reaction, the Fed only managed a 0.25% rise in December. Fischer said 2016 was fertile ground for another rise, possibly in September, but the huge volume of borrowing by governments and private corporations, especially among the emerging markets, Brexit, and the slowing US economy continues to make the Fed wary.
Negative interest rates
Kuroda recently said he would not rule out a “deepening cut” to the country’snegative interest rates. Draghi has followed the Japanese into negative territory, dragging the Swedish, Danish and Swiss national banks with him.
Negative rates mean that commercial banks must pay to keep their funds on deposit with a central bank. The policy aims to encourage commercial banks to do other things with the money – lend it or invest it in riskier assets.
But the effect has been to squeeze the gap between lending and borrowing rates, hitting bank profits. Even the Bank of England’s recent interest rate cut to 0.25% is expected to hit the profits of high street lenders.
Carney has vowed to avoid negative interest rates for just this reason and alongside the base rate cut to 0.25%, he set aside £100bn of cheap loans for the banks with the express aim of maintaining their profit margins.
Draghi is expected to release further funds later this year to boost lacklustre growth in the eurozone. The 19-member currency zone is trundling along with GDP growth just above 1% but this anaemic rate of expansion is unlikely to improve the dire jobs situation across much of the continent or push inflation closer to the European Central Bank’s 2% target.
Central bankers worry that for all Draghi’s optimism, Europe is going to be on monetary life support for a generation, as the the wealthy baby boomers of Germany, France and Italy stash their savings rather than spend it. For every euro the boomers stash away or invest in property, the central bank will need to print two just for the economy to inch ahead.
The latest figures show France beginning to recover and generate some private sector growth but with several countries still in recession and Greece ready to erupt at any time, the eurozone remains a a long-term problem
Fragile emerging markets
Brazil and Turkey are case studies in how strong emerging market economies can flip into recession, undermining the confidence among global investors that the recovery from 2008 is nearing completion.
Brazil suffered from the knock-on effects of a slowdown in China, along with a string of domestic scandals, while Turkey found its corporate sector facing extra credit costs following its heavy borrowing in dollars. Both economies were roaring in 2013 at a time when the west was struggling, propping up global growth. Within a couple of years they were in recession while Russia and China’s growth rate had slumped, leaving central banks to delay any return to normality.
Some central banks are frank about their determination to make exports more competitive by driving down the value of the local currency. Japan is a case in point. Kuroda was appointed by prime minister Shinzo Abe to fire two of the three arrows designed to rescue a stagnant economy – a cut in the cost of credit and a lower yen. A recent rise in the yen against the pound, the yuan and euro is likely to bring further monetary easing this year.
Draghi, despite his denials, has embarked on the same mission at the ECB. Almost all the rise in Italian and French exports in the last couple of years can be attributed to a cheaper euro. In London the lower value of the pound was widely seen as a positive post-Brexit benefit, not least by the Bank of England.
China has followed the same policy over the last year, sometimes clumsily, at other times without the world taking much notice.
For all of them the target is the same: the US. They want to drive down the value of their currency to compete with American businesses, which have enjoyed a stellar recovery riding on the back of a cheap dollar. The fear is that a rise in US interest rates and the value of the dollar is not a step towards normality but a shock that will upset the applecart again.