Bloomberg Businessweek - USA (2019-07-29)

◼ FINANCE BloombergBusinessweek July 29, 2019

It’sexpandedtherangeofassetsit buystoinclude

evenstocks,viaexchange-tradedfunds.Forthe

ECB,tradersareponderingif it willbuythebonds

ofbanks,whichit’sshiedawayfrom,inpartbecause

it alsoregulatesbanks.“Itwouldnotbeidealof

course,buttheECBhasalreadybeenforcedtoven-

tureintoprettycontroversialterritory,”saysGilles

Moec,groupchiefeconomistatAxaInvestment

Managers.“Givenwhatis leftoftheECB’sarsenal,

idealoptionsarenotonthemenu.”

Ultimately,centralbanksmayhavetoaimhigher.

Sincetheearly1990s,mosthavesetaninflationtar-

getonlytoundershootit inrecentyears.Someare

nowdebatingwhethertheyneedtoaimforaneven

fasterriseinconsumerprices—thatway,theycan

makeupforthetimeswhentheyfallshort.Andit

wouldsignaltomarkets,consumers,andbusinesses

thatpolicymakersareseriousaboutlettinginflation

runfora while.TheECBis reviewingitsstrategy,

includingaskingwhetheritstargetofconsumer

pricegrowth“below,butcloseto,2%”isappro-

priate,officialstoldBloombergNewsthismonth.

Draghifavorsa “symmetrical”approach,meaning

flexibilitytobeeitheraboveorbelowthe2%goal.

AdamPosen,a formerBankofEnglandpolicy-

makerandnowpresidentofthePetersonInstitute

forInternationalEconomicsinWashington,says

centralbankersshouldbeevenmoregutsyandrally

arounda 4%inflationtarget,toallowevenmore

stimulus.Alltheseideasmighthavesoundedodd

topolicymakersa decadeago,butsowouldhavean

economywithnegativeratesandhardlya peepof

inflation.�SimonKennedyandCraigStirling

25

PHOTO:

ANDREW

HARRER/BLOOMBERG.

ILLUSTRATION

BY

DAPHNÉ

GEISLER

THEBOTTOMLINE Togetgrowthgoingagain,thecentral

bankerswhohavepushedratesbelowzeromayhavetogeteven

moreambitious.Unlessgovernmentscanhelp.

rate below zero in 2014. But consider their position:

Making money cheaper is the main tool they have

to boost stubbornly slow growth. And they aren’t

getting a lot of help from governments.

ECB President Mario Draghi recently grumbled

that monetary policy had taken on a “dispropor-

tionate” burden in recent years. He and others

warn that when the next downturn hits, govern-

ments will need to play a bigger part in aiding

growth with fiscal stimulus. Christine Lagarde,

the outgoing head of the International Monetary

Fund—and Draghi’s expected successor at the ECB—

has urged Germany, which tends to have budget

surpluses, to cut taxes and raise spending.

The Organization for Economic Cooperation

and Development proposes that euro-area nations

coordinate fiscal stimulus in some countries, with

structural reforms in others, in tandem with loose

monetary policy. It estimates that such an effort

would raise gross domestic product growth by

around 0.75 percentage point this year and the next.

Some think central banks and governments

might have to work even more closely. “Greater

coordination between fiscal and monetary author-

ities is almost certainly the wave of the future,”

said Stephanie Kelton, a professor at Stony Brook

University in New York, in a Bloomberg News inter-

view. She’s an advocate of Modern Monetary Theory,

which says that lawmakers, not central bankers,

should take the lead in managing economies via

spending and taxes. Critics say this is a recipe for

spiraling government debt and rampant inflation

and would undermine the political independence

of central banks. To proponents, the idea provides

a solution to the risk of monetary policy impotence.

If governments continue to resist big fiscal stim-

ulus, what else might central banks be able to do

to get the economy and inflation to catch fire? For

a start, they can buy more bonds, pushing further

down on market borrowing costs in the hope con-

sumers and companies will be willing to borrow

to spend. That’s already in the cards for the ECB.

Bloomberg Economics predicts it will start buy-

ing €45 billion ($50 billion) in assets a month from

September. But such so-called quantitative easing

has already been exhaustively deployed. Torsten

Slok, chief economist at Deutsche Bank, recently

read 16 academic studies and concluded they tend

to suggest QE is “no longer a useful instrument.” If

faced with an average slump, Oxford Economics

reckons major central banks would need to buy

assets worth more than 20% of GDP—and be even

more radical in a deeper downturn.

If central banks want to be even more unconven-

tional, the Bank of Japan could provide a road map:

● Euro Stoxx Banks

price index

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