Central Banks Get Scared: Forget About Promises to Reduce Balance Sheets
After two years of a lot of aggressive-sounding talk about reducing the Fed's balance sheet and raising the target interest rate, the Fed in recent weeks has reversed itself, and declared that now's a time to take things more slowly.
At the January FOMC meeting, officials:
widely favored ending the runoff of the central bank’s balance sheet this year while expressing uncertainty over whether they would raise interest rates again in 2019, minutes of their January meeting showed.
“Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year,” according to the record of the Federal Open Market Committee’s Jan. 29-30 gathering released Wednesday.
This just represents more of the "we'll return to normal someday!" routine we've been getting from the Fed for about a decade. Over that time, we've repeatedly heard that once the economy is strong again, the Fed will reduce its balance sheet back to normal levels, and will raise the Fed Funds rate back to what had historically been more normal rates. Yet, after years of near-zero rates, and a Fed balance sheet of more than $4 trillion, it looks like the Fed lacks the resolve to do anything about it. Yet, if the economy isn't strong enough right now, with record-low unemployment, and surging job growth, when will it be strong enough?
The lack of Fed action has long been an indication of how weak the US economy has long been, in spite of headline numbers that suggested strength. In reality, incomes and wealth growth only reached former peak levels in the past three years, with most of the period of 2009-2016 being in negative territory when compared to 2000 or 2007.
But after what looks like three years of real growth, the Fed is still worried that even the mildest hawkishness on monetary policy will undue the moderate gains of the past decade.
For a sense of how far the Fed has come from more "normal" times, we can see how total assets remain near all-time highs, as the Fed attempts to manufacture demand in the economy:
And then there is the Fed Funds rate, which, in spite of 18 months of increases, remains well below where it was prior to the most recent two recessions:
Worldwide, we're seeing some similar hesitation from other central banks.
Yesterday, "Bank of Japan Governor Haruhiko Kuroda said the central bank would “of course” consider easing monetary policy further if the economy lost momentum toward achieving its 2 percent inflation target, the Asahi newspaper reported on Friday."
Meanwhile, the European Central Bank shows no signs of budging from its extremely accommodative monetary policy. Overall, it looks like European growth is flatlining.
Overall, if we look at major central banks worldwide, we see that only in the US and Canada have central banks done anything that might be considered "tightening." And even in the US and Canada, rates remains quite low. And in no cases do we see any significant moves toward reducing central bank assets.
This is apparently the best the central banks can do in a time of "expansion."
A summary of the most recently set rates:
- USA: 2.5%
- Canada: 1.75%
- UK: 0.75%
- Australia: 1.5%
- China: 4.35%
- ECB: -0.4%
- Japan: -0.1%
Note: All graphs by Ryan McMaken. Here are the specific key rates discussed here, with links: