The new era of global central banking is well and truly underway, says Howard Davies on Project Syndicate. Last month Jerome Powell, the chair of the US Federal Reserve, announced that the central bank would become more tolerant of inflation passing temporarily above the 2% target. Last week, the Fed held interest rates close to zero and signalled that they will stay there until the end of 2023.
The new dovishness has been prompted by persistently low US inflation, which has undershot the target 63% of the time over the past decade. Where the Fed leads others will follow. The European Central Bank is currently conducting its own policy review. Some are keen for the Bank of England to follow, but matters are more complicated for the UK: thanks to the persistently weak pound, “average inflation has been more or less on target” in recent years.
Heading towards zero
The Bank of England’s monetary policy committee (MPC) held interest rates at 0.1% and continued the current quantitative easing programme at its most recent meeting. Minutes revealed that policymakers were briefed on plans to roll out negative interest rates in the future. Governor Andrew Bailey this week reiterated that the policy is “in the tool bag” but pushed back against suggestions that they will be brought in soon.
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“Reading between the lines” it looks like the BoE will not be operationally ready to roll out negative rates until next spring, and then only if it wishes to do so, says Samuel Tombs of Pantheon Macroeconomics. In the meantime, policymakers will lean on more rounds of quantitative easing, which we expect to come around the new year. In the case of a no-deal Brexit, there will be even more quantitative easing and perhaps an interest rate cut to – “but not below” – zero.
MPC members will be studying the experience elsewhere in Europe, where negative interest rates are credited with arresting a deflationary spiral and boosting bank lending, says Tom Stevenson in The Daily Telegraph. Yet there is “scant evidence” that the policy increases economic activity and the effects on bank profits are dire. Beneath a certain level – known as the “reversal rate” – negative rates actually harm economic activity.
Investors adhere to the maxim that you “don’t fight the Fed”, says Jon Sindreu in The Wall Street Journal. The idea is that easy money means stocks are bound to rise. Yet this year’s tide of easy money has not lifted all boats: tech stocks have soared, but some other sectors have slumped. Perhaps there’s a simpler investment prescription for the new monetary era, David Rosenberg of Rosenberg Research tells Barron’s. The Federal Reserve’s “promise to nail rates to the floor” amounts to a giant “‘buy gold’ advertisement”.
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