Jun 11, 2019

The return of quantitative easing

Dion Rabouin, author of Markets

Bank of Japan Governor Haruhiko Kuroda at the G20 finance ministers' and central bank governors' meeting in Japan. Photo: Eugene Hoshiko/AFP/Getty Images

After pulling back from what was expected to be the year for global central bank policy tightening in January, policymakers are now giving markets a clear signal that they intend to start cutting interest rates, pouring stimulus on the economy. But analysts are skeptical the same song and dance will work this time.

What's happening: The Fed has signaled it will likely cut this year, while central bankers in Australia, New Zealand and India already have cut rates to historic lows with markets expecting more.

The intrigue: In places like the eurozone and Japan, where interest rates are already below 0%, central bank heads may have to get creative in order to stimulate their slumping economies.

What they're saying:

  • ECB vice president Luis de Guindos, in remarks from Madrid: "We remain alert in the wake of mounting global uncertainties. The Governing Council is, therefore, determined to act in case of adverse contingencies and also stands ready to adjust all of its instruments."
  • BOJ governor Haruhiko Kuroda told Bloomberg: "If the momentum to our 2% inflation target is lost, then of course, the Bank of Japan will swiftly respond by changing our policy."

What it means: During the financial crisis, central bankers used the extraordinary policies of QE to offset a potential depression scenario.

  • As a result, today the central bank policy toolkit is looking quite barren and market watchers are skeptical they will be able to make much difference in the event of a downturn.

"Stimulus looks like chimera," Danielle DiMartino Booth, CEO of research firm Quill Intelligence, tells Axios in an email. "Stimulus has hit a wall of diminishing returns as a consequence of policymakers never having the courage to normalize [interest rates]."

  • In spite of the elevated stimulus already undertaken by China, the U.S. and Europe in the form of government spending and monetary easing and unprecedented share buybacks by American companies, global growth is still slowing significantly, Booth says. "It's no wonder policymakers are making a coordinated effort to ease."

"Kuroda and de Guindos are whistling past the graveyard," Joseph Trevisani, senior analyst at FXStreet, tells Axios. "When a recession comes they may buy bonds and push rates further into negative territory, largely because they are supposed to do something, but it will have very limited effect on their economies."

Go deeper: Fed gives first sign it may cut interest rates

Go deeper

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Photo Illustration: Sarah Grillo/Axios. Photos: Noam Galai, Jamie McCarthy, Josep Lago/AFP, Alfredo Estrella/AFP, and Narayan Maharjan/NurPhoto, all via Getty Images

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