Just eight months after they swung into action to avert a crippling depression and credit crunch, central banks are in the uncomfortable position of relying on governments to power fragile economic rebounds.
The decisions their counterparts make will affect not just the growth outlook for the next few quarters, but could shape central banks’ policy options, and even their credibility, for years to come.
Monetary authorities entered the Covid-19 crisis with the least conventional policy space -- namely, interest-rate cuts -- of any postwar downturn. After pulling down borrowing costs near or even below zero and deploying massive asset-purchase programs, they are now practically begging governments to step up.
Without aggressive fiscal stimulus now, the danger is that economies develop deep scars that hobble growth over the longer term. That could then leave central banks unable to reset and prepare for the next shock or recession. Monetary policy and fiscal policy are now interdependent.
Global Easing in 2020
“This is definitely a new regime -- there simply isn’t enough demand in the global economy, and monetary policy can’t generate demand,” said Torsten Slok, chief economist at Apollo Global Management Inc. in New York.
Federal Reserve Chair Jerome Powell, who along with European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey will be addressing the ECB’s annual forum on Thursday, is among those calling attention to the risk of long-term damage.
“There is a real threat here of those things,” Powell said at a press conference last week, referring to the risk of more business bankruptcies and long, skill-eroding periods of unemployment. “We’ll have a stronger recovery if we can just get at least some more fiscal support when it’s appropriate.”
For now, government aid is present, helping to preserve jobs and production capacity. The worry is that it will be withdrawn too soon out of concern to repair public finances, even as the virus continues to rage.
“Massive fiscal support has preserved production capacity,” ECB Vice President Luis De Guindos said at an online conference Thursday. “It is important that this support is maintained and, in some areas, even scaled up in the coming months.”
Dual Action
British policy makers emphasized the power of dual action on March 11, when a BOE emergency rate cut was explicitly timed hours before the government outlined its own spending plans, and stress their ongoing coordination.