By John McDonald
Since the 2008 financial crisis, central banks have positioned themselves as global “first responders” despite the unsettling knowledge they have much less “firepower” than they once did. Most of these national banks, which serve national and international interests via servicing government and commercial banking systems, national monetary policy, and issuing currency, say they are prepared to do what they can to bolster the global economy if it runs into trouble.
In Europe, the European Central Bank appears likely to agree to generous terms of new long-term loans to other banks, while the U.S. Federal Reserve has signaled an ambiguously timed but clear indication of openness to loosening credit should it believe the move is necessary. In fact, former Treasury Secretary Lawrence Summers wrote in June that the Fed should cut interest rates by a full 50 basis points to ward off recession risks.
The result of this positioning has been to solidify somewhat volatile markets around the world, at least for now. However, with the Council on Foreign Relations showing monetary policy is now at its easiest since 2014 and JPMorgan Chase & Company recently predicting two possible Fed cuts, most analysts agree a slowdown in trade is likely coming.
“The mood regarding global growth [at the 2019 G-20] is likely to be distinctly gloomier than at the last G-20 gathering,” said former White House official and a current member of the Center for Strategic and International Studies Matthew Goodman of the sentiment at the event. He added, “This could put pressure on finance ministries and central banks in major economies to inject new stimulus.”
Not All Banks are On Board
While most major banks seem to agree they have a role to play in the international economy, not everyone is on board. In fact, in South Africa, governor Lesetja Kganyago said unequivocally in a recent interview he considers it his job to control inflation, not boost growth. Critics of President Trump’s trade policy are likely to agree with the governor, since many warn that ongoing Fed intervention in U.S. fiscal conditions could encourage the president and other politicians in the future to pursue policies without regard to immediate economic fall-out based on the assumption that the Fed and possibly other central banks will insulate the national economy.
Banks are Buying Up Equities
While all this continues, central banks have been busy buying up equities, increasing holdings to even more than $1 trillion. The move, Bloomberg analyst Simon Kennedy wrote, is likely to diversify reserves away from low-yielding bonds. Research group OMFIF supported this, noting that monetary authorities are presently allocating about 10 percent of their reserves to equities despite market volatility. OMFIF analysts added that about a quarter of those entities said they would purchase more stocks over the next 24 months.
Interestingly, the same survey indicated gold is more popular today among monetary authorities than it has been at any time in the past 50 years. During Q1 2019, central banks purchased more than 180 tons of the metal. Russia, Turkey, and Kazakhstan led the purchases in volume, OMFIF reported.