Just weeks after Janet Yellen’s Fed raised its benchmark rate for the first time in nine years, the notion that marked the end of the easy-money era is now being tested. Photo: Andrew HarrerJust when central bankers thought they were headed out, they’re getting dragged back in. Even with their toolkits depleted, monetary policy makers are being pushed to gear up yet again to counter the disinflationary fallout from slumping commodities and China’s slowdown. That leaves investors increasingly predicting the Federal Reserve will slow its campaign to raise interest rates and that the European Central Bank and Bank of Japan will soon deploy more stimulus measures. “Markets are sitting there hoping central banks will solve all,” says Nikhil Srinivasan, chief investment officer at Italian insurer Generali, whose assets total €480 billion ($743 billion). Calls for action are sounding at this week’s annual meeting of the World Economic Forum in Davos, Switzerland, where central bankers including Mario Draghi, Haruhiko Kuroda and Raghuram Rajan will mingle with the global elite on Friday. Just weeks since Janet Yellen’s Fed raised its benchmark rate for the first time in nine years, the notion that marked the end of the easy-money era is now being tested. “There’s not a country in the world that should not ease its monetary policies,” Ray Dalio, founder of hedge fund Bridgewater Associates, said in Davos on Thursday. Obstacles to sustained global growth are everywhere. China recorded its slowest annual expansion since 1990 and is letting the yuan fall, while stocks suffered their worst-ever start to a year and oil is the cheapest in more than a decade. The stronger dollar is pinching US exports, along with emerging markets which borrowed in the currency. Markets misbehave
All those forces will challenge the ability of central banks to meet the inflation targets they are already undershooting. Oxford Economics calculates a sustained slide in equities could alone cut as much as 0.9 per cent from global gross domestic product after two years. While Dalio is an outlier in reckoning the Fed’s next move will be toward a resumption of quantitative easing, fellow Davos delegates echoed his call for Yellen to be wary of raising rates despite the Fed’s projection of four more quarter-point increases this year. “Until you see the reality of this inflation in the system, I’m not sure assuming it’s coming is a good assumption,” said Gary Cohn, president of Goldman Sachs. Meantime, ECB president Draghi said Thursday that “downside risks have increased again” and readied the euro area for even more support from the central bank. Just last month, he disappointed some investors by not easing as much as anticipated. The price of free moneySome say investors are paying the price for too many years of free money. “Markets have been distorted by QE,” said Paul Singer, the billionaire founder of $US27 billion hedge-fund firm Elliott Management. “So there’s a possibility of a kind of tectonic shift if bond and stock market investors lose confidence.” That reflects an analysis that central banks can achieve little more and governments must step up. The International Monetary Fund this week predicted inflation of just 1.1 per cent this year in advanced economies, around half the rate most policy makers target. “Certainly monetary stimulus has run its course,” said Rajan, the governor of the Reserve Bank of India. “Which doesn’t mean its practitioners won’t keep trying. As Draghi said Thursday, there are “no limits” on what he’ll do to meet his mandate.
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