Out of Ammo? The Eroding Power of Central Banks
Since the financial crisis, central banks have slashed interest rates, purchased vast quantities of sovereign bonds and bailed out banks. Now, though, their influence appears to be on the wane with measures producing paltry results. Do they still have control?
Once every six weeks, the most powerful players in the global economy meet on the 18th floor of an ugly office building near the train station in the Swiss city of Basel. The group includes United States Federal Reserve Chair Janet Yellen and her counterpart at the European Central Bank (ECB), Mario Draghi, along with 16 other top monetary policy officials from Beijing, Frankfurt, Paris and elsewhere.
The attendees spend almost two hours exchanging views in a debate chaired by Bank of Mexico Governor Agustín Carstens. Waiters serve an exquisite meal and expensive wine as the central bankers talk about the economy, growth and market prices. No one keeps minutes, but the world's most influential money managers are convinced that the meetings help expand their knowledge in important ways. "We learn what makes our counterparts tick," says one attendee.
These closed-door meetings, which are held on Sunday evenings, have a long tradition. But ever since many central banks lowered their interest rates to almost zero, bought up sovereign debt and rescued banks, a new, critical undertone has crept into the dinner conversations. Monetary experts from emerging economies complain that the measures taken by Europeans and Americans are pushing unwanted speculative money their way. Western central bankers say they have come under growing political pressure. And recently, when the host of the meetings -- head of the Basel-based Bank for International Settlements Jaime Caruana -- speaks in one of his rare public appearances, he talks about "chronic post-crisis weakness" and "risk." Monetary institutions, says Caruana, are at "serious risk of exhausting the policy room for manoeuver over time."
These are unusual words, especially now that the world's central bankers, five years after the Lehman crash, are more powerful than ever. They set interest rates and control the money supply, oversee governments and banks and, like Bank of England Governor Mark Carney, are treated a bit like movie stars by the public.
To an extent unprecedented in postwar history, monetary watchdogs -- who are not elected and are usually independent of their countries' governments -- determine what happens in politics and on the markets. They are the new "masters of the universe." Yet their internal discussions on the effects of their power do not give the impression of resounding success. Growth is limping along in the world's major economies; banks, households and governments are deeply in debt; and the bankers' so-called unconventional monetary policy is running up against its limits everywhere.
Holding onto the Wheel
In the United States, the members of the Federal Reserve Board of Governors are grappling with the question of when they should stop spending trillions to buy up treasury bonds. In the United Kingdom, the central bank is confusing the public with contradictory announcements about future interest-rate decisions. And in Europe, the divided monetary watchdogs on the ECB Council are searching for a way to combat low inflation rates.
At the most recent meeting of the International Monetary Fund (IMF) in Washington, financial policy experts and bank industry executives urged central banker governors to continue their policy of cheap money. More bond purchases were discussed, as were negative interest rates and central bank deals involving collateralized debt securities. It almost seems as though monetary policy officials are now being asked to come up with as many financial innovations as investment bankers once did.
The central bank heads aren't particularly impressed. They are more inclined to believe they have done enough already and wonder whether their actions might now be doing more harm than good. Interviews with central bankers and monetary theorists leave the impression of a vast cognitive divide: Whereas the public wants central banks to continue driving the economy, bank heads feel they are increasingly no longer the only ones holding onto the wheel.