FED DECISION TO GO IT ALONE BUCKS HISTORY OF COLLABORATION / THE FINANCIAL TIMES

Fed decision to go it alone bucks history of collaboration

Policymakers who co-ordinated action in past will introduce virus measures separately

Chris Giles in London, Robin Harding in Tokyo, Martin Arnold in Frankfurt and Brendan Greeley in Washington



© FT Montage/Bloomberg


The US Federal Reserve did not tell fellow G7 central banks beforehand that it would launch its first emergency rate cut since the financial crisis, nor did it seek to get them to join in, according to people with knowledge of Tuesday’s discussions.

It was a stark difference to past moments of economic peril, in which the group of leading nations acted in co-ordination.

Other members of the G7 held off on any monetary policy action on Tuesday; instead after a conference call finance ministers issued a bland statement pledging to use “all appropriate policy tools” to address the fallout from coronavirus.

By contrast, as the financial crisis took hold in October 2008 the world’s leading central banks cut interest rates simultaneously in a bid to halt the gathering storm in credit markets. Just two days later, G7 finance ministers pledged “exceptional action” to address the crisis.

According to officials with knowledge of this week’s discussions, the muted response was because coronavirus does not need shock-and-awe tactics but targeted measures depending on the spread of the disease.

That leaves each central bank to consider what action to take — and how bad the economic outlook could get before it does.





Japan

The question for the Bank of Japan is whether the yen holds at ¥107. The BoJ’s big worry is that Fed rate cut leads to a weaker dollar, hurting Japan’s exports.

Governor Haruhiko Kuroda has vowed “to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases”, after which the BoJ bought almost $1bn in equity exchange traded funds, a daily record.

But privately the BoJ concedes doubts about whether the benefits of further action would outweigh the costs.

Kiichi Murashima, chief economist at Citi in Tokyo, said his base case was for increased equity purchases at the next BoJ meeting, but he is “highly sceptical” about the potential for rate cuts, which would hurt already-struggling regional banks.

“At least historically, it has been quite important for Japanese policymakers to be seen to act [with other central banks] in a co-ordinated manner,” said Mr Murashima. “But it is questionable how much weight they actually put on it.”

Financial support — in the form of government subsidies, banking forbearance and a BoJ liquidity facility — is a more likely area of action. Corporate balance sheets are generally in good shape, but the disappearance of Chinese tourists has led to a string of bankruptcies in recent weeks. The government is seeking ways to tide vulnerable companies over.

Prime minister Shinzo Abe is trying to launch a targeted fiscal stimulus, promising wage subsidies, but the crisis has exposed the contradictions in his fiscal policy. The economy was already reeling from October’s consumption tax rise but reversing that is politically difficult.



The eurozone

Given the debate about the downsides of negative rates in Europe, a cut from the European Central Bank is unlikely to be Christine Lagarde’s preferred option.

The ECB could beef up its cheap loans to banks, or encourage banks to be lenient with companies that run into trouble. Italian bank UniCredit has already introduced similar measures. The ECB could also join with other central banks to launch a co-ordinated liquidity injection into the banking system, if necessary.

“The main policy issue in a pandemic is to avoid liquidity squeezes leading to SME bankruptcies, ie. targeted liquidity measures to circumvent the negative growth chain reaction of containment, confidence, credit quality, bank capital constraints and defaults, that is in play now,” said Lena Komileva, chief economist at G+ Economics.

The EU is prepared to relax its fiscal rules to counteract the economic impact of the coronavirus, but only temporarily, Mário Centeno, head of the eurogroup of eurozone finance ministers, said on Wednesday. The European Commission last week earmarked €232m to help contain the disease and Italy has announced a €3.6bn stimulus package while seeking permission to widen its deficit.

But ECB officials are pushing for more support from governments, particularly from countries like Germany, which is in a healthy fiscal position.

“Co-ordination is basically a code word for putting pressure on Germany to use its budget surplus to do more,” said one member of the ECB’s governing council.

The Fed’s rate cut puts pressure on other central banks to follow suit by weakening the dollar, the council member said: “Where co-operation gets difficult is when you have central banks competing to devalue their currencies. The recent euro appreciation has a tightening effect on the economy.”



The UK

Even with rates close to all-time lows, outgoing governor Mark Carney believes the Bank of England has firepower equivalent to a 2.5 percentage point rate cut if it uses more quantitative easing, forward guidance and cheap loans to banks.

Andrew Bailey, incoming BoE governor, said on Wednesday it was likely the central bank and UK government would soon need to provide bridging finance to small companies.

Chancellor Rishi Sunak will announce the UK’s fiscal response to coronavirus in the Budget next week. With a deficit of less than 2 per cent of national income the UK faces no specific fiscal constraints, although the government is considering targeted relief for affected households and companies rather than a broader stimulus.

UK banks are better capitalised than during the 2008 financial crisis; ministers have urged them to show tolerance towards companies which face temporary cash flow difficulties.




The US

There is little appetite among Fed policymakers for negative rates. That leaves the Fed close to what it now calls the “effective lower bound”: zero. Mr Powell has called this the “pre-eminent monetary policy challenge of our time”.

The Fed will use both asset purchases and forward guidance aggressively if it has to, but Mr Powell has ruled out anything beyond rate cuts for now. He was hesitant to say the tools he had would work at all.

Congress and the White House on Wednesday agreed an $8bn appropriation for public health measures. Donald Trump has proposed a one-year payroll tax cut, while members of the US Chamber of Commerce have suggested expanding a business loan programme for disasters, but neither are a formal policy proposal.

On Tuesday Mr Powell said: “It’s possible there will be some more formal considered co-ordination as we move forward.”

But for the moment, he warned, “it’s up to individual countries, individual fiscal policies and individual central banks to do what they’re going to do”.