Economists: Central banks must pursue divergent interest-rate strategies
By Martin Crutsinger
AP Economics Writer
WASHINGTON (AP) — The central bankers meeting this week at their annual conference in Jackson Hole, Wyoming, aren’t exactly in sync. Many are taking steps that clash with the policies of others.
The Federal Reserve is preparing to reduce its economic support. By contrast, the European Central Bank is considering more stimulus. So is the Bank of Japan. The Bank of England seems to be moving toward raising interest rates.
It isn’t just the biggest economies whose central banks are pulling in different directions.
This year, central banks in Mexico, Sweden and South Korea, among others, have lowered rates. Others — in Russia and South Africa, for example — have raised them.
It’s a long way from the coordinated efforts that major central banks made after the 2008 financial crisis erupted and economies began to stall. As governments slashed taxes and spent stimulus money, central banks shrank rates to unclog credit and avert a 1930s-style depression.
Today’s diverging central bank strategies aren’t without risk. Consider what happened in developing markets last year after Fed officials hinted that they might soon slow the pace of their monthly bond purchases. Those purchases have been intended to keep long-term U.S. loan rates low to encourage borrowing and spur growth.
With the prospect of higher U.S. bond yields, some emerging markets went into a tailspin. Investors pulled their holdings from those countries for fear their value would plunge as capital fled for the United States.
Some emerging economies responded by raising their own rates and bolstering their shaky currencies. The tumult proved temporary. But it showed what could happen once the Fed ends its bond purchases this fall and eventually raises short-term rates — something it says won’t happen for a “considerable time” after its purchases end.
Many economists say central banks have no choice but to pursue divergent interest-rate strategies now because of their economies’ varying growth rates.
“It just reflects different stages of the economic recovery in different parts of the world,” said Stuart Hoffman, chief economist at PNC Financial Services Group. “The U.S. recovery is well ahead of recoveries in Europe and Japan.”
Sung Won Sohn, an economics professor at California State University, Channel Islands, noted that the United States acted faster than others to boost growth with aggressive low-rate policies. U.S. regulators have also been more forceful in requiring U.S. banks to raise capital and deal with bad loans. Those actions have contributed to stronger U.S. growth, he said.
Healthier growth prospects and the likelihood of higher rates could make the United States increasingly attractive to investors. Sohn and Hoffman think the U.S. dollar will rise in value, particularly against Japan’s yen and the common European currency, the euro, as investors seek rising U.S. yields.
Here’s a look at policies being pursued by key central banks:
Federal Reserve
The Fed has reduced its monthly bond purchases at six straight meetings, from $85 billion a month to $25 billion a month. Chair Janet Yellen repeated the view last Friday that she expects the Fed to end the purchases altogether this fall. What no one knows is when the Fed will start raising short-term rates. Most economists think it will be in mid-2015. Though U.S. hiring has been strong and the unemployment rate has dropped steadily to 6.2 percent, other gauges of the job market, such as pay growth, remain weak. When Yellen gave the keynote speech in Jackson Hole last Friday morning, she suggested that the Great Recession complicated the Fed’s ability to assess those gauges to determine when to adjust rates.
European Central Bank
Mario Draghi, head of the ECB, said in a speech at Jackson Hole last Friday that the ECB was ready to do more to boost the shaky recovery among the 18 nations that use the euro currency. Draghi has noted in the past that the ECB and the Fed are operating on conflicting tracks: The Fed is looking to gradually raise rates, while the ECB is sticking with a low-rate policy and is open to providing further help if the eurozone economy — which failed to grow at all last quarter — should worsen. Draghi’s comments have helped lower the euro’s value against the dollar. A cheaper euro makes European exports more affordable and U.S. products more expensive in European markets.
Bank of Japan
Haruhiko Kuroda, head of Japan’s central bank, told reporters in Jackson Hole last Friday that the bank planned to continue its “extremely accommodative monetary stance” until inflation has risen to the bank’s 2 percent target and doesn’t fall back. He said the bank’s support could be expanded if necessary. Japan’s economy shrank at an annual pace of 6.8 percent in the second quarter, in part because a new sales-tax increase depressed consumer spending. Japan’s gross domestic product fell at a 1.7 percent rate compared with the same quarter a year ago. It was Japan’s worst quarterly decline in GDP since the tsunami and earthquake that hit in 2011. The economic plunge dealt a setback to the government of Prime Minister Shinzo Abe. He has been trying to pull the world’s third-largest economy out of two decades of stagnation with the help of aggressive action by the Bank of Japan. The economic weakness has heightened the pressure on Japan’s central bank to expand its stimulative efforts.
Bank of England
Britain’s central bank has kept its main rate at a record low of 0.5 percent since 2009 to help support the economy. But faster growth and declining unemployment have raised expectations that rates will start rising soon. This month, the Bank of England’s consensus on maintaining ultra-low rates collapsed after more than three years. Two members of its monetary policy committee voted to raise the rate by 0.25 percentage point because growth has picked up, according to minutes of the most recent committee meeting. Still, the other members still felt there wasn’t enough evidence of rising inflation or wages to justify an immediate rate increase. Benjamin Broadbent, the Bank of England’s deputy governor for monetary policy, said in an interview at Jackson Hole that even when it starts raising rates, it will likely be gradual because “you have to be careful not to stamp on a recovery before it’s really got going.”
Other central banks
Private forecasters have sharply revised their economic growth forecasts for such countries as Russia, which is being hurt by sanctions imposed over its actions in Ukraine. Russia’s central bank boosted rates to defend its currency and try to stem the outflow of foreign capital. Brazil, South America’s largest economy, has been hurt by a steep fall in industrial production. That has resulted, in part, from high interest rates and an overvalued currency.
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AP writer Matthew Brown contributed to this report from Jackson Hole, Wyoming, and AP Business Writer David McHugh contributed from Frankfurt, Germany.
