Central Banks Likely to Stay Easy in 2015 as Normalcy Is Elusive.

http://www.bloomberg.com/news/2014-12-01/central-banks-likely-to-stay-easy-in-2015-as-normalcy-is-elusive.html

The world’s central bankers could be forgiven for thinking that things are never going to get back to normal. More than six years after the financial crisis plunged the world into recession, monetary policy looks nothing like it did before those events.

Even as economists predict that the U.S. Federal Reserve and Bank of England will finally begin to raise benchmark rates in 2015, the central banks are unlikely to push borrowing costs anywhere near pre-crisis, inflation-fighting levels. And even though the Fed in October ended the bond-buying campaign it undertook when the U.S. economy was weaker, it isn’t shedding the assets it bought. The European Central Bank and Bank of Japan, for their part, are stepping up purchases.

Central bankers know that global growth is shaky, that debt is rising and that they’re getting little help from government fiscal policies, Bloomberg Markets magazine will report in its January issue. Economic progress will again depend on the monetary spigot in the coming year -- as will stock prices, bond yields, commodities demand and currency rates.

“Given the slow and unsteady nature of the recovery, supportive policy remains necessary,” Fed ChairJanet Yellen said on Nov. 7 at a conference of central bankers in Paris. Monetary officials should keep trying extraordinary measures, Yellen argued, especially because fiscal policy today remains “somewhat contractionary.”

The world’s central bankers could be forgiven for thinking that things are never going to get back to normal. More than six years after the financial crisis plunged the world into recession, monetary policy looks nothing like it did before those events.

Even as economists predict that the U.S. Federal Reserve and Bank of England will finally begin to raise benchmark rates in 2015, the central banks are unlikely to push borrowing costs anywhere near pre-crisis, inflation-fighting levels. And even though the Fed in October ended the bond-buying campaign it undertook when the U.S. economy was weaker, it isn’t shedding the assets it bought. The European Central Bank and Bank of Japan, for their part, are stepping up purchases.

Central bankers know that global growth is shaky, that debt is rising and that they’re getting little help from government fiscal policies, Bloomberg Markets magazine will report in its January issue. Economic progress will again depend on the monetary spigot in the coming year -- as will stock prices, bond yields, commodities demand and currency rates.

“Given the slow and unsteady nature of the recovery, supportive policy remains necessary,” Fed ChairJanet Yellen said on Nov. 7 at a conference of central bankers in Paris. Monetary officials should keep trying extraordinary measures, Yellen argued, especially because fiscal policy today remains “somewhat contractionary.”

Fiscal Constraints

In the U.S., more government spending to stimulate growth isn’t in the cards, especially after Republicans won full control of Congress in November’s election. In the euro zone, governments can back away from austerity only slightly before they run up against European Union rules and German opposition. In Japan, Prime Minister Shinzo Abe’s fiscal stimulus plan has been blunted by a consumption tax increase that went into effect in April.

‘Impossible Task’

The difficulty of getting out after six years of mostly coordinated global monetary stimulus was evident in stock markets recently. The MSCI World Index lost about 9 percent in September and the first half of October before gaining almost all of it back over the next six weeks. No single reason can explain such a swing, but investors attributed the sell-off to concern that global growth is slowing, that deflation is a threat -- and that, this time, monetary policy responses are exhausted.

The Fed has been trying to gradually wean investors and the economy off of quantitative easing, tapering its asset purchases from $85 billion a month in 2013 to $15 billion in October 2014.

Bond Buyers

At a meeting on Oct. 29, Yellen ended the bond-buying program. By then, stocks were rebounding. The Fed’s move didn’t interrupt the momentum, and right away, stocks got new support from central bankers elsewhere.

Bank of Japan Governor Haruhiko Kuroda and his policy board said on Oct. 31 that they would boost asset purchases to an annual pace of about 80 trillion yen ($675 billion).

Currency War

A currency war of sorts may be brewing, in which officials in Europe and Japan try to weaken the euro and yen to help them avoid deflation.

“Though there is no explicit agreement by representatives of the Group of Seven to drive the dollar higher, much of the world now agrees the U.S. currency should appreciate,” says Stephen Jen, co-founder of London-based hedge-fund firm SLJ Macro Partners LLP.

Punishing Savers

Central bank efforts to keep borrowing costs low punish those who need to build retirement nest eggs, according to Larry Fink, chief executive officer of BlackRock Inc., the world’s largest money manager, who spoke at the same Paris conference as Yellen. And when savers are hurting, Fink said, that does its own harm to economic growth.

A survey of financial professionals, meanwhile, shows concern about the potential for rising rates to send fixed-income investments into a dive. In the Bloomberg Global Poll, run Nov. 11 and 12, traders, investors and bankers identified government debt and high-yield corporate bonds as the asset classes they would most likely sell short, preferring them over real estate, stocks and even gold as a place to bet on a rout.

The U.S. central bank and the BOE have said they won’t start selling the securities they have acquired until after they begin raising rates. The BOJ and ECB, of course, are still adding assets.

Reliant Markets

Stock markets have become reliant on monetary support, says Matt King, global head of credit strategy at Citigroup Inc. He estimates that central banks need to pump about $200 billion into the global economy every quarter to keep stocks from falling -- and that no net monetary stimulus would cause a 10 percent quarterly drop.

The sudden sell-off in October was a reaction to the withdrawal of central bank support, which was as high as $1 trillion per quarter in 2012, King says, and the rebound was spurred by expectations that the BOJ and ECB would do more -- which they did.

Central bankers are stepping carefully, convinced that a 'slow and unsteady' global economy still needs their support.