Having been pushed ever deeper into unconventional policies, including negative interest rates and quantitative easing that is increasingly being referred to as “QE infinity,” the ECB finds it increasingly difficult to do more, rightly fearing that the costs and risks of further policy stimulus could well outweigh the benefits. At the same time, it feels unable to unwind its distortionary policy interventions, worried that this would disrupt economic activity. Its current compromise position doesn’t help either, amplifying loud internal divisions and undermining its external credibility.
Central bank policy announcements continue to attract a lot of attention even though too many years of them being the “only game in town” policy-wise have materially reduced their ability to change the economy for the better. This week’s FOMC meeting will be no exception, highlighting deepening dilemmas and even greater dependence on other government entities which, unfortunately, have yet to step up to their policy responsibilities.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."