CENTRAL BANKS SIGNAL END TO SHORT-LIVED ERA OF RESTRAINT / THE WALL STREET JOURNAL

Central Banks Signal End to Short-Lived Era of Restraint

Reversal could support markets in the months ahead, including sectors like housing and autos that are sensitive to interest rates

By Brian Blackstone


Jerome Powell indicated that the Federal Reserve was done raising interest rates for now, fueling a market rally. Photo: Alex Brandon/Associated Press


A slowing global economy and low inflation has central banks around the world rethinking plans to gradually pull back financial stimulus from markets and the banking system.

The role reversal could support the economy in the months ahead and bolster markets and sectors like housing and autos.

Central bankers have geared their messages toward pausing on tightening steps rather than imminently launching new stimulus. That is because they doubt the global economy is going beyond a slowdown toward outright recession.

The Fed on Wednesday signaled that it was done raising interest rates for now to see if recent weakness abroad and political uncertainty leads to a sharper-than-expected slowdown in U.S. growth.

“We think that these…risks are going to be with us for a while,” Fed Chairman Jerome Powell said, after officials voted to hold rates steady. In a further sign of the abrupt shift, officials removed all language from their policy statement that had previously pointed to additional rate increases.

Central banks in South Korea, Malaysia and Indonesia kept rates unchanged this month after raising them in 2018. At its meeting last week, the Bank of Japan downgraded its inflation forecasts, suggesting no end in sight to its asset purchases and negative policy rate. China’s central bank, meanwhile, has taken a number of steps to improve credit to businesses.

In Canada, where the economy is sensitive to the U.S. and commodity markets, the central bank kept rates unchanged at 1.75% in January—it had raised them four times in a little more than one year through last October—and signaled a wait-and-see approach on future increases.

The Bank of England is expected to leave its rate at 0.75% when it meets next week, and future increases depend on how smoothly Brexit proceeds.

And last week, the European Central Bank downgraded its assessment of the European economy, opening the door to new stimulus including a promise to keep interest rates where they are for a longer period or a fresh batch of cheap loans to Banks.



Mario Draghi warned that recent economic data for the eurozone have been weaker than expected, and that continuing uncertainties, particularly relating to trade protectionism, are weighing on economic sentiment. Photo: stephanie lecocq/Shutterstock


On Monday, ECB President Mario Draghi said restarting the giant bond-purchase program that ended in December was an option “if things go very wrong,” though he also said that isn’t his forecast.

Globally, trouble spots including Brexit and the U.S.-China trade dispute could sort themselves out, giving policy makers space to get back on track with rate increases later this year. Unemployment is low in many parts of the world and wages are rising, providing support to household spending.


Under this optimistic scenario, this year could turn into a repeat of 2016, when the Federal Reserve spent most of the year on the sidelines, after a single 2015 rate increase, while it monitored market correction triggered by worries of a sharp slowdown in China. It resumed rate increases at the end of that year.

The Fed’s Mr. Powell raised the analogy to 2016 at a Jan. 4 panel discussion when he sought to dispel market fears that the U.S. central bank was on a preset path to raise rates.

There is a risk that the global economy will turn out to be weaker than it was three years ago. With the U.S., China and Europe all slowing, the window for central bankers to increase interest rates and significantly shrink their bondholdings may have already closed. The International Monetary Fund this month cut its 2019 forecast for global economic growth to 3.5% from 3.7%, citing weakness in Europe and Asia.

“You can’t be in a tightening cycle if the economy doesn’t support it,” said Roberto Perli, head of global policy at Cornerstone Macro. The annual inflation rate in Europe and Japan is below the 2% rate that central bankers consider optimal, and could fall further. In the U.S. it has shown signs of slowing.

In Europe and Japan, negative interest rates are likely to persist for many months if not years, keeping bond yields low. In addition to holding interest rates for now, the Fed is eyeing a larger bond portfolio than it had considered before.

“The coordinating tightening of monetary policy can have effects on a weak economy, so the postponement of that tightening may have the effect of stimulus,” said Raghuram Rajan, who led the Reserve Bank of India from 2013 to 2016.

If the current pause turns into a full stop, then the Federal Reserve is best equipped among major central banks to pivot to interest rate cuts to reduce long-term interest rates and spur spending and investment should the U.S. economy falter. Its policy rate is in a range of 2.25% to 2.5%.

Still, the Fed’s policy rate is just half a point above the rate of annual inflation, a narrow gap 10 years into an economic expansion when inflation-adjusted rates are usually much higher. “If the economy can’t handle even that, and that growth is going to be hit, it does suggest a fairly weak global economy still,” said Mr. Rajan.

In contrast, negative rates in Europe and Japan give central banks there little recourse but to buy large amounts of public and private debt, or lend money to banks, if needed in a downturn. Credit is already ultra cheap in Europe, so it is unclear how much more stimulus can be delivered.

“If the next global downturn is anything more than a modest one, then central banks will quickly have to dip into their unconventional tool kits,” said Neil Shearing, chief economist at Capital Economics.

That is a shift from last year when the ECB was widely expected to raise its policy rate—which has been at minus 0.4% for nearly three years—later in 2019. Countries outside the eurozone but dependent on it for trade, like Switzerland which has a minus 0.75% policy rate, were expected to follow the ECB by the end of this year. But those forecasts have been pushed off as well.


—Nick Timiraos contributed to this article.