Global central bankers are again in the driving seat when it comes to propping up the world economy, but many are demanding governments join them in the rescue effort.
Amid slowing global growth, the Federal Reserve, European Central Bank and perhaps even the Bank of Japan are all set to ease monetary policy in coming months. But with less room to act than in the past, their leaders are telling politicians they will need to act if a downturn takes hold.
The pressure could be applied in person on Wednesday when central bankers and finance ministers from the Group of Seven nations meet for talks north of Paris. They convene at a hazardous juncture for the global economy, as an unpredictable trade war risks precipitating a deeper downturn, and some bond markets hint at a growing possibility of a recession.
G-7 host nation France may even offer a reason to take note. President Emmanuel Macron’s 17 billion euros ($19.2 billion) of support for consumers in response to the Yellow Vests protests may have been contrary to his deficit-reduction mantra, but is proving fortuitous amid a global slowdown. French growth in 2019 is expected to outpace the euro-area average for the first time in six years.
“We are seeing political risks rising everywhere, so addressing the lack of growth that benefits all is quite urgent,” said Laurence Boone, chief economist at the OECD. “That cannot be achieved only through monetary policy.”
Central banks are already set to play their part to preserve the expansion. Fed Chairman Jerome Powell last week all but confirmed he will cut interest rates this month, while ECB President Mario Draghi is leaning in the same direction.
But with limited firepower and bloated balance sheets, they say that this time they can’t do it alone. The Fed, for example, has a benchmark rate half the level it had before past downturns. The BOJ and ECB are below zero already.
“We would expect to see fiscal policy being the new monetary policy going forward,” said Andrew Bosomworth, a portfolio manager at Pacific Investment Management Co.
While Powell has warned the U.S. fiscal position is unsustainable in the long-run, he said last week it’s “not a good thing to have monetary policy being the main game in town.” The U.S. got a boost in 2018 from President Donald Trump’s $1.5 trillion tax overhaul, but that effect is fading.
In Europe, Draghi has complained that monetary policy has taken on a “disproportionate’’ burden in the last decade.