Upheaval in the global markets in recent months may be signaling that the era of the all-powerful central bank may be coming to an end.
Evidence is mounting that central bank moves are having less and less of the desired impact on regional economies.
For Exhibit A we turn to the People’s Bank of China, whose interventions have failed to stop a massive capital exit, a stock market meltdown and a sharp decline in the yuan.
For Exhibit B we look at the Bank of Japan, which has taken the Japanese treasury market deep into negative interest rates without turning around its sagging stock market.
Exhibit C is the European Central Bank, which also is trying to stimulate growth with the opposite result that the Euro has strengthened against the dollar in recent days.
Finally, there is Exhibit D, Federal Reserve Chair Janet Yellen’s testimony before Congress on Feb. 10. She indicated the Fed is now backing away from its earlier goal to “normalize” interest rates with regular rate hikes over the next few years.
Instead, she testified that the Fed will be flexible, a pretty transparent signal that more rate hikes are on hold after a quarter-point rise in December triggered concerns that the U.S. was headed into recession.
I’m not alone in this sort of thinking. In his new book, “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse,” author-columnist-financier Mohamed A. El-Erian argues that the Fed has pretty much reached the limits of its post-financial crisis ability to steer large global economies.
Instead, he says that policy makers must now step in to address systemic problems such as the enlarged role that financial institutions play in our economy, the dangerous tendency toward currency devaluation as a policy tool and rising income inequality in the industrial world.
In writing about the limits of central bank power, El-Erian, an experienced and highly conventional thinker about policy, is in agreement with Axel Merk, a maverick hard currency advocate.
Earlier this year, Merk had the audacity to warn about a potential bear market for equities when few people saw one in the offing. Shortly before Yellen’s testimony, he bluntly called the Federal Reserve “clueless” because of its reliance on labor data that is often backward looking.
While El-Erian and Merk occupy opposite ends of the investing spectrum, both are suggesting that monetary policy now must take a back seat to fiscal policy. For most experts that means a return to common sense ways to rein in spending, increase taxes or close loopholes, reform entitlements and get things back on a sustainable path.
In October 1979, Federal Reserve Chair Paul Volcker put central banking on the map when he began using monetary policy to set interest rates, a move that eventually succeeded in breaking the back of inflation and setting the nation on a course to decades of prosperity.
After the 2008 financial crisis, former Chair Ben Bernanke took the Fed into uncharted territory, injecting capital directly into banks, taking interest rates quickly to zero and buying trillions of dollars in government bonds to keep rates artificially low.
His successor, Yellen, has come under a lot of criticism for the Fed’s delay in raising rates over the summer and fall when the economy was looking a bit more crisp.
Reading between the lines of her comments to Congress on Feb. 10, you can sense a strong desire to get the Fed out of the limelight and gradually nudge interest rates back to the 2 percent range.
My guess is that she’d be relieved to see the end of the era of central bank supremacy – especially if the transition can be accomplished without going through yet another financial crisis.
It’s not clear whether or not she will get her wish.
• Reach Editor Henry Dubroff at [email protected]