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Monetary Policy Pushback - July 30, 2019

As the Fed sits in communication “time-out” ahead of its announcement and all-important press conference tomorrow, more voices are speaking out against the broad trends in central bank policy. While some take issue with the rent-seeking around the policies, like Merryn Webb blasting BlackRock for calling on the ECB to buy equities, a couple big names spoke out against the fundamental premises behind easy money.

 “A Dangerous Addiction”

 First on the list is Ruchir Sharma, chief global strategist at Morgan Stanely, who explained in the New York Times, “Why We Should Fear Easy Money”. In the short term, Sharma points to several downsides of easy policy. Taking from the experience of Japan, Sharma reminds readers that though central banks can metaphorically print money, they “can’t dictate where it will go”. Instead, the money tends to go to those who need it least, “the wealthy, monopolies, [and] corporate debtors”. This leads to “squeezing out” of small companies and startups, along with a rising number of “zombie firms” which are not profitable enough to cover their interest payments”. However, the longer-term consequences are even worse. As easy money lifts stocks and bonds, and encourages “people to take on more debt”, it sets “the stage for the kind of debt-fueled market collapse that has preceded the economic downturns of recent decades”. Sharma concludes, “Our economy is hooked on easy money –and it is a dangerous addiction”.

 “They Need to Explain”

 The second dissenting voice we want to highlight this week is that of D.L. Thornton. In a recent edition of Common Sense Economics Perspectives, Thornton, an ex-Vice President at the St. Louis Fed, asks policymakers to question whether monetary policy can stimulate economic growth. While admitting that monetary policy can be useful if economic problems are due to a decline in spending, Thornton argues that there “is no agreement... whether persistently low interest rates can make an economy that is growing slowly grow at a faster rate”. Since the financial crisis, the result of policies “has been the same—economic growth slower than before”. In addition to being unable to affect the factors related to growth in output directly, monetary policy can affect neither investment nor consumer spending. What’s more, “persistently low-interest rates reduce the real income of retirees and others with fixed nominal incomes” and forces people to “invest in more risky assets in the search for higher returns”. Given the impotence and drawbacks of low-interest rate policies, Thornton says central banks have some explaining to do: “They need to explain why economic growth has remained weak in spite of the aggressive low-interest rate policies they’ve already pursued and why they expect the outcome to be different this time”.

However, if these and other warnings fall on deaf ears, a recent article from Min Jeong Lee and Masaki Kondo shows how “Japan’s experience offers investors an invaluable precedent” and gives “insights into strategies“ to survive a zero rates regime. Get ready for the “hunt for yield”!