In this unprecedented era of central bank intervention in the global economy, we’ve seen an increasing use of bellicose and militaristic metaphors for monetary policy tools—”Bazookas! Sinks! Aggressive Doves!” a recent Wall Street Journal headline declares sardonically of the figurative language that central bankers have resorted to.
Heck, even the title of this article relies upon the metaphoric logic of the Federal Reserve’s policy tools as a form of “ammunition.” It is simply too tempting, when we are locked in a “battle” with deflation and other troubling macroeconomic forces, to avoid such rhetoric.
In spite of the tough talk from central banks, however, it appears that the “arsenal” may be exhausted.
Fortunately (or unfortunately, depending on who you ask), there seems to be no analogue to a “nuclear option” in monetary policy. Professional economists like former Fed Chair Ben Bernanke want to bombard banks with “helicopter money” rather than, well, “cash bombs” or “capital cruise missiles.”
(It’s not too late for such phrases to find their way into central banking parlance, of course.)
Substituting Talk for Action
Most people intuitively understand that the old cliché about “talk is cheap” has some merit. Action matters more than rhetoric.
The major action from central banks has largely already been undertaken. Massive amounts of quantitative easing (QE) and other forms of economic stimulus, like ultra-low and even negative interest rates, have already been tried. The intended results have been underwhelming while these measures have created the risks of asset bubbles, unmanageable debt, and yet unforeseen consequences.
In light of their ineffectual actions, central banks have naturally resorted to colorful language as a way to compensate for this reality. The interesting idea here isn’t merely that rhetoric is the only option that policymakers have left. It’s also worth noting that the statements of central bankers, however vague they may be, actually do seem to have a greater effect than policy changes in today’s markets.
Traders and investors alike have become conditioned to hang on every word from Fed Chair Janet Yellen and her peers on the Federal Reserve Open Market Committee (FOMC). The Fed and other central banks use this pattern to influence market behavior—hence the constant talking up of rate hikes while no such action is undertaken.
Out of Tools
Writing for the Telegraph, a major publication in the U.K., Ambrose Evans-Pritchard casts doubt about how the Federal Reserve can get itself out of the hole it has dug.
He believes that the Fed is essentially impotent to deal with a future recession because, with the federal funds rate as low as 0.25% to 0.50%, interest rates cannot reasonably be pushed sufficiently lower. (Cutting interest rates is the typical response to an economic downturn.) In terms of more QE, doing more of what hasn’t worked doesn’t appear to be a winning strategy.
While Evans-Pritchard notes (as have others) that complementary fiscal policy is the missing element in the recovery, he concedes that there is no political will in the U.S. Congress for such spending. The blind march toward the next inevitable recessions seems to be a black hole that no amount of central bank intervention can help the economy escape from.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.