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| Central Banks Act With a New Boldness to Revitalize Economies | |
| (about 4 hours later) | |
| When James Bullard, president of the Federal Reserve Bank of St. Louis, arrived in Frankfurt last week, he issued an unusual public warning to the European Central Bank: Be bolder. | When James Bullard, president of the Federal Reserve Bank of St. Louis, arrived in Frankfurt last week, he issued an unusual public warning to the European Central Bank: Be bolder. |
| Central bankers, anywhere in the world, are a cautious lot. They prefer slow and steady over the dramatic gesture. And they rarely go public with criticisms of other central banks. | Central bankers, anywhere in the world, are a cautious lot. They prefer slow and steady over the dramatic gesture. And they rarely go public with criticisms of other central banks. |
| But the economic stagnation of the major developed nations has driven central banks in the United States, Japan, Britain and the European Union to take increasingly aggressive action. Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices. | But the economic stagnation of the major developed nations has driven central banks in the United States, Japan, Britain and the European Union to take increasingly aggressive action. Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices. |
| The Fed has announced plans to keep borrowing costs at historic lows until unemployment declines. The staid Bank of England has bought more than a half-trillion dollars’ worth of bonds to ignite British business activity. | The Fed has announced plans to keep borrowing costs at historic lows until unemployment declines. The staid Bank of England has bought more than a half-trillion dollars’ worth of bonds to ignite British business activity. |
| Last month, Haruhiko Kuroda, the new chairman of the Bank of Japan, steered the central bank toward an audacious new policy of reinflating the Japanese economy by doubling the money supply. It is considered the boldest step so far by a central bank. | Last month, Haruhiko Kuroda, the new chairman of the Bank of Japan, steered the central bank toward an audacious new policy of reinflating the Japanese economy by doubling the money supply. It is considered the boldest step so far by a central bank. |
| So far, the results of these activist central banks have fallen short of expectations. | |
| “I’m not sure why we’re not getting more response,” said Donald L. Kohn, a former Federal Reserve vice chairman who is now at the Brookings Institution. “Maybe we’ve made some progress in identifying some of the causes, but it’s not fully satisfying why we have negative real interest rates everywhere in the industrial world and so little growth.” | |
| Certainly investors around the world watch for any sign that the central bankers are backing away from their bold steps. | |
| Stock markets wobbled in Japan and elsewhere last week on fears that the Federal Reserve might start pulling back on its stimulus sooner than expected and that Japan’s effort might fall short of its goal of reviving the economy. A few central bankers’ reassurances seemed to calm the markets. | |
| The lackluster results have provided cover for the European Central Bank, which has remained the most cautious of the major central banks. It is sticking to the more traditional formula of cutting interest rates — a string Japan ineffectually pushed for more than a decade — in the hopes that it will encourage banks to lend more money to businesses. | The lackluster results have provided cover for the European Central Bank, which has remained the most cautious of the major central banks. It is sticking to the more traditional formula of cutting interest rates — a string Japan ineffectually pushed for more than a decade — in the hopes that it will encourage banks to lend more money to businesses. |
| The Federal Reserve in the United States has been significantly more aggressive since December 2008, when the Fed reduced its benchmark short-term interest rate nearly to zero. Ever since, it has pursued a pair of experiments aimed at dragging other interest rates closer to zero, too. | The Federal Reserve in the United States has been significantly more aggressive since December 2008, when the Fed reduced its benchmark short-term interest rate nearly to zero. Ever since, it has pursued a pair of experiments aimed at dragging other interest rates closer to zero, too. |
| The Fed has tried to bolster confidence that rates will stay low by talking more about the future. In December, it said it intended to keep short-term rates near zero at least as long as the unemployment rate remained above 6.5 percent, the first time it had tied policy to a specific target. That, and buying almost $3 trillion in Treasury and mortgage-backed securities, has helped to cut borrowing costs for businesses and consumers. | The Fed has tried to bolster confidence that rates will stay low by talking more about the future. In December, it said it intended to keep short-term rates near zero at least as long as the unemployment rate remained above 6.5 percent, the first time it had tied policy to a specific target. That, and buying almost $3 trillion in Treasury and mortgage-backed securities, has helped to cut borrowing costs for businesses and consumers. |
| While the share of Americans with jobs has barely budged and other economic indicators remain weak at best, the Standard & Poor’s 500-stock index has doubled since the Fed announced its first round of bond purchases in November 2008. Interest rates on mortgages and car loans are near the lowest levels on record. Average yields on junk bonds fell below 5 percent for the first time. Corporations with strong credit ratings, like Apple, also are /> borrowing vast sums at little cost. | |
| Still, for all the daring, some critics argue that the Fed is not trying hard enough. “It’s as if we went to the biggest fire we’ve ever seen and we poured more water on it than we’ve ever poured, and the fire isn’t completely out,” said Joseph E. Gagnon, a former Fed economist now at the Peterson Institute for International Economics. “Well, we should try more water.” | Still, for all the daring, some critics argue that the Fed is not trying hard enough. “It’s as if we went to the biggest fire we’ve ever seen and we poured more water on it than we’ve ever poured, and the fire isn’t completely out,” said Joseph E. Gagnon, a former Fed economist now at the Peterson Institute for International Economics. “Well, we should try more water.” |
| Officials in Britain, too, are debating its central bank’s ability to do more. | |
| Last month, the departing governor of the Bank of England, Mervyn King, gave a speech at the International Monetary Fund in which he said — a bit acidly — that there was a limit to what monetary policy could do to spur recovery in a country like Britain, where a small number of stingy banks dominate the economy and the government is tightening its spending. | |
| Like other central banks around the world, the Bank of England, by far the oldest of them all, has done its part to ward off a depression. It has bought, to date, the equivalent of $569 billion worth of government bonds — a bold use of the printing press for an institution known for its hidebound ways. | Like other central banks around the world, the Bank of England, by far the oldest of them all, has done its part to ward off a depression. It has bought, to date, the equivalent of $569 billion worth of government bonds — a bold use of the printing press for an institution known for its hidebound ways. |
| This shock treatment, the professorial Mr. King pointed out, equaled 20 percent of the British economy, outpacing the central bank interventions of the European Central Bank, the Bank of Japan and the Federal Reserve. | This shock treatment, the professorial Mr. King pointed out, equaled 20 percent of the British economy, outpacing the central bank interventions of the European Central Bank, the Bank of Japan and the Federal Reserve. |
| And what does Mr. King have to show for his monetary exertions — beyond record stock market highs and bottom-scraping yields for British corporate bonds? An anemic recovery. Growth this year is expected to be 0.5 percent, according to the monetary fund, while Japan’s gross domestic product grew at an annualized rate of 3.5 percent in the first quarter and the United States’ is expected to grow a little more than 2 percent. | |
| “There is a limit to what the central bank can achieve,” said Robert Wood, chief economist for Britain at Berenberg Bank in London, who worked previously at the Bank of England. “Britain’s problem is that it is still paying for its past sins — simply wishing we could be where we were before the crisis is just not going to happen.” | “There is a limit to what the central bank can achieve,” said Robert Wood, chief economist for Britain at Berenberg Bank in London, who worked previously at the Bank of England. “Britain’s problem is that it is still paying for its past sins — simply wishing we could be where we were before the crisis is just not going to happen.” |
| Japan’s willingness to use huge government spending — despite racking up incredible debt to do so — is unique among the developed economies. | Japan’s willingness to use huge government spending — despite racking up incredible debt to do so — is unique among the developed economies. |
| Under Prime Minister Shinzo Abe, the country is coupling its central bank action with fiscal stimulus, which means that the new money created by the bank is put to use. Calls for austerity have largely fallen on deaf ears. In the land famous for building bridges to nowhere, Mr. Abe pushed through an emergency stimulus package of 10 trillion yen, or $98.7 billion, and Parliament passed a further 92.6 trillion yen budget for 2013, with heavy spending on public works. | Under Prime Minister Shinzo Abe, the country is coupling its central bank action with fiscal stimulus, which means that the new money created by the bank is put to use. Calls for austerity have largely fallen on deaf ears. In the land famous for building bridges to nowhere, Mr. Abe pushed through an emergency stimulus package of 10 trillion yen, or $98.7 billion, and Parliament passed a further 92.6 trillion yen budget for 2013, with heavy spending on public works. |
| But in a happy confluence of policies, because the central bank promises to buy up the bonds that the government issues, interest rates are for now unlikely to soar out of control, while the weakening yen has created a surge in exporter profits, putting Japan in a policy sweet spot. | But in a happy confluence of policies, because the central bank promises to buy up the bonds that the government issues, interest rates are for now unlikely to soar out of control, while the weakening yen has created a surge in exporter profits, putting Japan in a policy sweet spot. |
| All eyes are now on Mario Draghi, president of the European Central Bank. A creative and determined central banker, he must find some unconventional way to prevent Europe from becoming stuck in the economic rut that held back Japan for most of two decades. | All eyes are now on Mario Draghi, president of the European Central Bank. A creative and determined central banker, he must find some unconventional way to prevent Europe from becoming stuck in the economic rut that held back Japan for most of two decades. |
| An interest rate cut in early May is unlikely to do much to promote the flow of credit to countries like Italy, Greece, /> Portugal and Spain. Even with the benchmark rate at 0.5 percent, down from 0.75 percent, cheap money is not persuading banks to lend and businesses to borrow. | |
| There is fear that Germany and other countries like Austria and Finland are about to be swallowed by the recession that has afflicted Southern Europe for more than a year and has just reached France. Unemployment in the euro zone is 12.1 percent, and in Greece and Spain more than a quarter of the work force is jobless. | There is fear that Germany and other countries like Austria and Finland are about to be swallowed by the recession that has afflicted Southern Europe for more than a year and has just reached France. Unemployment in the euro zone is 12.1 percent, and in Greece and Spain more than a quarter of the work force is jobless. |
| The European Central Bank faces legal and political restraints that make it harder for the bank to imitate the other major central banks. It cannot finance governments, which limits its ability to buy any country’s bonds. Mr. Draghi has argued that doing so in any case would not accomplish much in the euro zone because most companies get their credit from banks rather than by issuing corporate bonds. | The European Central Bank faces legal and political restraints that make it harder for the bank to imitate the other major central banks. It cannot finance governments, which limits its ability to buy any country’s bonds. Mr. Draghi has argued that doing so in any case would not accomplish much in the euro zone because most companies get their credit from banks rather than by issuing corporate bonds. |
| “It is different from the United States,” Mr. Draghi told reporters after the bank’s governing council met this month in Bratislava, Slovakia. | “It is different from the United States,” Mr. Draghi told reporters after the bank’s governing council met this month in Bratislava, Slovakia. |
| “In the United States, 80 percent of credit intermediation goes via the capital markets,” he said. “In the European situation it is the other way round. Eighty percent of financial intermediation goes through the banking system. So, you are left with buying what?” | “In the United States, 80 percent of credit intermediation goes via the capital markets,” he said. “In the European situation it is the other way round. Eighty percent of financial intermediation goes through the banking system. So, you are left with buying what?” |
| The European Central Bank is sworn to guard price stability above all else, so it is extremely cautious about any effort to inflate the currency, even as inflation in the euro zone is 1.2 percent and falling. But other central banks, operating under similar mandates, have concluded that deflation is now a greater concern. | The European Central Bank is sworn to guard price stability above all else, so it is extremely cautious about any effort to inflate the currency, even as inflation in the euro zone is 1.2 percent and falling. But other central banks, operating under similar mandates, have concluded that deflation is now a greater concern. |
| Falling prices can freeze economic activity as buyers wait for still-lower prices, a cycle that is hard to reverse. Japan, the only major economy to fall into such a pattern in modern times, has struggled to escape for almost two decades. | Falling prices can freeze economic activity as buyers wait for still-lower prices, a cycle that is hard to reverse. Japan, the only major economy to fall into such a pattern in modern times, has struggled to escape for almost two decades. |
| Marie Diron, a former European Central Bank economist who now advises the consulting firm Ernst & Young, said, “The Japan scenario is a risk.” | Marie Diron, a former European Central Bank economist who now advises the consulting firm Ernst & Young, said, “The Japan scenario is a risk.” |
| On his trip to Frankfurt, Mr. Bullard told an audience at Goethe University that Europe needed to act. “The lesson of Japan is that once you get stuck, it’s very hard to get out.” | On his trip to Frankfurt, Mr. Bullard told an audience at Goethe University that Europe needed to act. “The lesson of Japan is that once you get stuck, it’s very hard to get out.” |
| “One way to get stuck,” he said, “would be not to take aggressive action.” | “One way to get stuck,” he said, “would be not to take aggressive action.” |
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