Central bankers and investors warned of mounting costs from six years of easy monetary policy even as most acknowledged the world still needs low interest rates.
The downsides of cheap cash provided the dominant theme at a Bank of France conference in Paris Friday attended by the likes of U.S. Federal Reserve Chair Janet Yellen and Bank of Japan Governor Haruhiko Kuroda as well as Allianz SE’s Mohamed El-Erian and Laurence D. Fink of BlackRock Inc.
Among the gripes: Central-bank stimulus has relieved pressure on governments to revamp their economies, punished savers, inflated asset bubbles and left financial markets overly reliant on liquidity and prone to volatility when it reverses.
“This is a world which places too much of a burden on central banks,” said El-Erian, the former chief executive officer of Pacific Investment Management Co. and now an adviser to Allianz. “This is a journey, not a destination. If the journey lasts too long, central banks go from being part of the solution to perhaps being part of the problem.”
Loose monetary policy is still justified, said Yellen as she urged her colleagues to “employ all available tools, including unconventional policies, to support economic growth and reach their inflation targets.”
“Given the slow and unsteady nature of the recovery, supportive policy remains necessary,” she said, calling current tactics a mix of “extraordinary monetary policy stimulus and somewhat contractionary fiscal policy.”
The message from most conference participants was that too much has been expected of the monetary authorities by investors and politicians since the 2008 global financial crisis and subsequent recession.
Governments should look to spend if they can and also make their economies more flexible, said International Monetary Fund Managing Director Christine Lagarde.
“All available policies should be used,” she said. “Monetary policy cannot be the only game in town.”
Bank of France Governor Christian Noyer said a “paramount risk of very low interest rates is to entertain the illusion that governments can continue to borrow rather than make difficult and yet necessary choices and indefinitely put off the implementation of structural reforms.”
“The bottom line is there is a very good question about whether more stimulus is the answer,” said Reserve Bank of India Governor Raghuram Rajan. “More stimulus may ease the pain of reform” yet can’t substitute for it, he said.
Even so, the European Central Bank has told its staff to prepare further measures that can be used if needed to spur inflation, and the BOJ is boosting its own bond-purchase program.
Kuroda said in Paris that his actions are complemented by a government that is committed to providing short-term fiscal support and policies to make the markets for agriculture, services and labor more flexible.
“The Bank of Japan is not the only game in town,” he said. “The government has been implementing measures to achieve those committed objectives.”
The ECB has also called on politicians to accelerate structural adjustments, with President Mario Draghi saying yesterday, after keeping interest rates on hold at a record low, that insufficient progress is a “key downward risk to the economic outlook.”
New York Fed President William C. Dudley, Mexican central banker Agustin Carstens and Bank of England Governor Mark Carney warned of the potential for greater market volatility when policy makers start to normalize interest rates. The BOE and Fed have stopped buying assets.
“The transition could be bumpy,” said Carney, while adding that is no reason to delay a normalization. Eventual rate increases in the U.K. will probably be “limited and gradual,” he said.
Acknowledging that the Fed has an obligation to support global financial stability and has sometimes fallen short in that regard, Dudley said a likely increase in U.S. rates next year will “undoubtedly be accompanied by some degree of market turbulence.”
Speaking of emerging markets such as his, Carstens said there is a “potential for financial market disruption and at the center of this is the unwinding of unconventional monetary policy” and the need to “jump this hump” of a recalibrating of policy in advanced economies.
El-Erian, a Bloomberg View columnist, said the coming divergence in monetary policies around the world when the Fed tightens and others stay easy will “place pressure” on financial markets, especially currencies. The euro is trading near a more than two-year low against the dollar.
A possible precursor to how markets will behave when stimulus is pulled back was evident last month when stocks fell amid investor concern the global economy was faltering again and central banks lacked the ammunition to support it.
Fink, CEO of New York-based BlackRock, the world’s largest money manager, said that decline was “healthy and necessary” and “quite cleansing, quite important for the foundation of markets.”
Cheap borrowing costs have punished savers and left them shunning the risk needed to deliver decent returns for their retirement accounts, hurting economic expansions, Fink said.
In a warning that Carney disagreed with, Fink said financial institutions could end up “refusing to lend” if rates stay where they are for an extended period of time.
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