Jul 26, 2019

More negative interest rates won't save Europe

Illustration: Aïda Amer/Axios

The hope for interest rate cuts and more quantitative easing in September was not enough to placate the market on Thursday as stocks fell in the U.S. and Europe after an announcement from ECB President Mario Draghi that gave the distinct impression the central bank would ease monetary policy at its next meeting.

The state of play: Most analysts said the reaction from the market was due to Draghi sounding more hawkish than expected, but investors may simply be waking up to the idea that central bank easing isn't what it once was, and the ECB's policy tool kit looks exhausted.

What they're saying: "Negative interest rates and more QE will only have a small impact, but given there are no other alternatives central banks really don’t have any other options," Torsten Sløk, chief economist at Deutsche Bank Securities, tells Axios in an email.

  • "The big option is of course fiscal policy but that is up to the politicians. And for political reasons there is very little room to maneuver for fiscal policy at the moment both in the US and Europe."
  • Joseph Trevisani, senior analyst at FX Street, adds: "Europe's problems are not cyclical. They are long-term weak demand, slow growth and the scarcity of worthwhile investments. These cannot be addressed by negative rates."

Be smart: Recent academic papers examining the impacts of quantitative easing show that it is no longer a useful instrument.

  • A January report from Princeton University researchers Markus K. Brunnermeier and Yann Koby suggests there comes a point at which lowering interest rates actually makes things worse, and "depresses rather than stimulates the economy."
  • The ECB's current -0.4% interest rate has clearly not created a sustainable stimulus, so it's possible that lowering it further could hurt rather than help the eurozone, further exaggerating the economic slowdown.

What's next: Market heavyweights, including BlackRock chief investment officer of global fixed income Rick Rieder and Ethan Harris, Bank of America-Merrill Lynch’s head of global economic research, expect the ECB may have to start buying stocks to keep the economy from stagnating.

  • But with a more limited pool of equities to choose from, given Europe's relatively small stock market, that may not enough.

Go deeper: Germany is Europe's most economically dangerous country

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Central banking's brave new world

Illustration: Aïda Amer/Axios

The European Central Bank is leading the charge in the next wave of central bank stimulus measures, but experts and former central bankers argue it will be insufficient to deal with the looming global downturn.

Why it matters: Central banks see that the global economy is in trouble and they are stepping in to act, but are responding to new problems with old solutions. The eurozone already has negative interest rates and the ECB already has spent trillions buying bonds in an attempt to stimulate the economy. In spite of these efforts, major European economies have been unable to generate inflation or growth that's even close to their targets for years.

Go deeperArrowAug 16, 2019

The ECB likes inflation now

Illustration: Sarah Grillo/Axios

The European Central Bank [ECB] is the oldest inflation target in the world, and certainly the one that carries the most political baggage. This week, with very little fanfare, it changed dramatically.

Background: Germany's Bundesbank implemented an inflation target in 1975 — a full 15 years before New Zealand's target was formally adopted. Germany's target started at 4.5%, but it rapidly fell to 2% in 1987, and was never subsequently changed.

Go deeperArrowJul 28, 2019

Central banks haven't cut this much since the financial crisis

Adapted from a Goldman Sachs chart; Chart: Axios Visuaals

Investors are pricing in a 100% chance the Fed cuts rates at its next meeting in September after Monday's market carnage, joining central banks around the globe that are providing more stimulus to their respective economies.

Why it matters: While the prospect of more interest rate cuts had buoyed the stock market going into last week's Fed meeting, Monday's sell-off showed that investors no longer view that as enough to sustain current price levels.

Go deeperArrowAug 6, 2019