Even while they encourage fiscal cooperation, central bankers have kept up their guard to preserve their independence. After all, from Europe to Japan they were granted autonomy decades ago out of recognition of the need to wall off money creation from political impulses.
Bailey was explicit in addressing the risk last week.
“It’s perfectly possible to have coordinated policy and obviously be very cognizant of the importance of the independence of the Bank of England,” the BOE chief told reporters Nov. 5.
Even so, escalating government debt burdens will make future monetary tightening all the more costly, potentially limiting central banks’ room to maneuver.
Already, an uptick in U.S. government bond yields this week, spurred in part by investor optimism over prospects for an effective coronavirus vaccine, has strengthened expectations for further Fed asset purchases as soon as by year-end.
Lagarde, speaking to the ECB’s virtual conference Wednesday, highlighted that asset purchases along with long-term bank funding are the tools to focus on in the next wave of monetary stimulus. Fed watchers see the potential for adjustments in the quantitative easing program next month.
The Catch-22 for central banks is that the longer they keep their balance sheets bloated and interest rates near zero, the greater the risk of their being seen as having limited power.
‘Second Fiddle’
“Right now, fiscal policy is doing what it has to do and monetary policy is playing second fiddle,” said Erik Nielsen, group chief economist at UniCredit SpA. “Most central bankers now are saying, this is the right policy at this time, but boy am I uncomfortable about it.”
Every central banker knows what lies at the end of a policy response that fails to restore the economy’s longer-term growth track: Japanification.
Since it adopted a zero-rate policy two decades ago, Japan’s central bank has gone on to snap up over 40% of the country’s government bond market, blowing its balance sheet out to more than 138% of gross domestic product.