September16, 20 19 BARRON’S 7
Less Clout for Central Banks?
T
HE FEDERAL RESERVE WILL HOLD ITS MOST IMPOR-
tant policy meeting this week since, well, its last
one inJuly and until its next one in October.
That’s the pitch whenever theFederal Open
Market Committee gets together,which happens every six
weeks or so. And the line is just as true as ever.Butasig-
nificant shift may be at hand for theFed and the world’s
other major central banks.
Monetary policy,aspracticed for the past
four decades, might be changing. With inter-
est rates at historic lows, and below zero
percentinmuch of the world, its ability to
continue to guide and sustain the world’s ad-
vanced economies could be nearing an end.
Fiscal policy—that is, government spending
andtaxing decisions—could take on greater
importance.
That’sthe message from Mario Draghi
following his penultimate meeting presiding
over the European Central Bank this past week.Japan
couldalso be ready to expand its fiscal stimulus after
nearly three decades with the world’slowest interest
rates, which have failed to end that nation’s near economic
stagnation and deflation.
As forthe U.S., its fiscal policy already is easy.The
federal government just announced that its deficit for the
11 months of fiscal 2019was more than $1 trillion.Tobe
sure, that excludes September,the final month of the fiscal
year,inwhich Uncle Sam typically runsasurplus. But the
shortfall still equals more than 4% of gross domestic prod-
uct, a deficit normal during recessions, but not in the11th
year of an expansion.
Across the pond, the European Central Bank’s official
monetary moves this past week consisted ofa10-basis-point
(0.1 ofapercentage point) cut in its policy rate to minus
0.50%, with “tiering” to exempt some banks from the conse-
quent charge on their deposits at the ECB;anew round of
refinancing operations; andaresumption of the ECB’sasset
purchases of up to 20 billion euros ($22.15billion)amonth.
But that wasn’t the real point, writes Bill Blain, strate-
gist at Shard Capital in London, in his ever-witty Morning
Porridge missive.
“Europeisheading downanew road—the fiscal super-
highway.Draghi confirmed it when he called it ‘Time for
FiscalPolicy to take Charge,’ challenging governments
with ‘fiscal space to act in an effective and timely manner.’
It wasaperfect setup for his successor,Christine Lagarde,
who has but one role: to ensure that the politics of Europe
fall in with fiscal stimulus.”
And rather than worrying that more euro-zone borrow-
ing portendsadebt crisis, ECB purchasing should hoover
up the bonds sold to cover deficits, he adds. “Strip it to
the core and you could argue all that’sreally happening
is the ECB is printing lots of money for European states
to juice their economies.”
That’spreferable to negative interest
rates, which act asatax on banks, contend
JohnRyding and Conrad DeQuadros of RDQ
Economics.
Andit’salso preferable in the minds of
most German savers.Arecent story on the
European Central Bank in the German daily
newspaper Bild was headlined, “Count Drag-
hila is sucking our accounts dry.” It pictured
the ECB chief as the infamous vampire.
The RDQ team notes that Germany is considering es-
tablishing an agency to finance infrastructure and climate-
change spending without violating deficit rules, which
Chancellor Angela Merkel said wouldbemoney “well in-
vested.” That shows an important change in thinking after
five years of Berlin budget surpluses.
Japan also might be moving to fiscal stimulus, according
to Steven Ricchiuto, U.S. chief economist at Mizuho Securi-
ties. While Prime Minister Shinzo Abe had been considering
a second round of consumption taxes, Ricchiuto had eye-
opening conversations with clients on a recentTokyo trip
about modern monetary theory,ahot topic in economics and
financial circles.
Basically,MMT would allow fiscal deficits to be financed
by the central bank, with the constraint being when this
debt monetization boosts inflation near an unacceptable
level. With the main alleged economic problem now being
that inflation is too low,that constraint is absent.
The federal-funds futures market on Friday placed an
89.6%probability ona25-basis-point cut in theFed’skey
interest rate this past week. President DonaldTrump
would like theFedtogotozero,orbelow,toget the econ-
omy running hot while his tariff wars cool global trade and
worsen uncertainty.
TheFedalready has stopped shrinking its balance
sheetand will be buying moreTreasury securities with
reinvested interest and maturing issues.Aresumption of
Monetarypolicy,as
practicedfordecades,
mightbegivingway
togovernmenttaxing
andspendingpolicies.
Up &Down WallStreet
ByRandallW.Forsyth
38 BARRON’S September16, 20 19
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