Investors around the world seem to have concluded that the central banks have run out of ammo.

The financial press certainly found that to be a very useful explanation for the plunge in stock prices since the start of the year.

A more accurate explanation is that Fed policy diverged radically (and dangerously) from the ultra-easy policies of the other major central banks at the end of last year when the FOMC hiked the federal funds rate by 25bps and suggested that four more hikes were likely this year.

Recently, Fed officials seem to have backed off from this projection, while the other central banks are reloading their bazookas with perhaps their last round of ammo.

Let’s review the latest developments:
 
(1) ECB. ECB President Mario Draghi promised in early January to do more to stimulate the Eurozone’s economy in March. More QE is likely to deliver disappointing results since interest rates are already low. More negative interest rates are likely to worsen the profitability of the banks and reduce their willingness to lend.
 
Nevertheless, Draghi told European Parliament lawmakers in Brussels on Monday, “In the light of the recent financial turmoil, we will analyze the state of transmission of our monetary impulses by the financial system and in particular by banks.” In addition, the ECB will examine the impact of renewed declines in energy prices and “if either of these two factors entail downward risks to price stability, we will not hesitate to act,” he said.
 
(2) BOJ. The 2/11 WSJ reported, “A close adviser to Prime Minister Shinzo Abe said Friday that the Bank of Japan may call an emergency meeting to undertake additional monetary easing if financial markets remain turbulent. Etsuro Honda, a former finance ministry bureaucrat, said the government needs to delay a sales-tax increase scheduled for next year and should consider an additional fiscal stimulus package. … The central bank has no policy meeting scheduled until mid-March, but Mr. Honda predicted that the BOJ wouldn’t wait until then to take action if it determined that its campaign to decisively escape deflation and generate 2% inflation is in danger.”
 
(3) PBOC. The Chinese authorities once again are pumping massive amounts of credit to sustain economic growth in China. PBOC data released yesterday showed that aggregate financing surged to 3.42 trillion yuan ($522 billion) in January. Bank loans rose 2.50 trillion yuan ($388 billion). All this credit may not do much for the economy if it represents Chinese borrowers scrambling to convert their dollar-denominated overseas loans into domestic loans. By the way, while bank loans (in yuan) are up 15.2% y/y, M2 is up 14.0%, a 19-month high.
 
Meanwhile, on the fiscal side, the Chinese communists remain committed Keynesians according to a 2/16 Bloomberg report: “Under the plan to juice infrastructure spending, the National Development and Reform Commission plans to offer 400 billion yuan this quarter under a special bond program so local authorities can finance infrastructure, people familiar with the matter said. Making 400 billion yuan available in each of the next three quarters would mark a doubling in the pace of funding under the bond program. Economic planners offered 800 billion yuan in bonds last year. The NDRC unveiled the special bond program last year as part of efforts to boost spending.”
 
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.