Paul Krugman says that Federal Reserve may have made a historic blunder this week in signaling its intent to “taper” the pace of bond purchases, with an eye towards ending them completely sometime in 2014.
By taking a hawkish turn before the economy has recovered (it’s still nowhere close on employment goals, and inflation trends are going the wrong way) the Fed may have lost any credibility to restimulate should it come to that.
Four days after Bernanke’s guns-blazing press conference, we get another datapoint indicating that the central banks of the world are ready to say “no mas” in the fight against depression.
In a speech given today, Jaime Caruana, General Manager of the Bank for International Settlements, said the following:
Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road. And it is a call for recognising that returning to stability and prosperity is a shared responsibility. Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilizing public finances
The title of Caruana’s speech is Making The Most Of Borrowed Time, and it’s filled with warnings about what happens if central banks keep stimulating for too long.
Read these three paragraphs. It’s basically a white flag, saying we’re done here.
Central banks have borrowed the time that the private and public sectors need for adjustment, but they cannot substitute for it. Moreover, such borrowing has costs. As the stimulus is sustained, it magnifies the challenges of normalising monetary policy; it increases financial stability risks; and it worsens the misallocation of capital.
Finally, prolonging the period of very low interest rates further exposes open economies to spillovers that are now widely recognised. The challenges are particularly severe for the emerging market economies and smaller advanced economies where credit and property prices have been rapidly growing. The risks from such a domestic credit boom at a late stage of the economic cycle are hard enough to manage. Strong capital inflows exacerbate such risks and challenges for market participants and authorities; and they expose economies to large sudden reversals if markets expect an exit from unconventional policies, as volatility during the past few weeks seems to indicate.
In short, the balance of costs and benefits entailed by continued monetary easing has been deteriorating. Borrowed time should be used to restore the foundations of solid long-term growth. This includes ending the dependence on debt; improving economic flexibility to strengthen productivity growth; completing regulatory reform; and recognising the limits of what central banks can and should do.
So you have the BIS and the Fed both signaling the end is nigh for how much central banks can do at this point. It looks like a central banker strike.
Meanwhile, this past week, we saw the People’s Bank of China allow SHIBOR (a measure of intrabank lending similar to LIBOR) to surge, in what was seen as a tool to clamp down on speculation.
Ostensibly the Bank of Japan is just in the beginning of a new era of easing, though even they’re internally divided according to reports.
Thanks to political gridlock (especially in the US), central banks have done much of the heavy lifting in the recovery. That seems to be coming to an end.
Hopefully escape velocity has been achieved.
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