Economists believe that central banks will not be as impetuous to unleash quantitative easing measures and that these institutions will not be quick to decimate their economies to vanquish inflation, according to a new Bloomberg survey.
The business news network surveyed economists worldwide to gather their views on the lessons learned from multi-decade-high inflation.
In the early days of the coronavirus pandemic, the Federal Reserve and other major central banks initiated a so-called mother of all stimulus and relief bombs. This consisted of slashing interest rates to nearly zero, buying government and corporate bonds, and starting programs that could cushion the economic blows of the public health crisis.
The Fed expanded the money supply by more than 40 percent and grew its balance sheet by 115 percent, to $8.945 trillion. Since March 2022, the money supply has contracted by nearly 4 percent since its peak, though it is still higher than before COVID-19. The balance sheet has also declined roughly $1 trillion since the institution reduced its Treasury holdings.
While the U.S. and its central bank counterparts have been quick to fire off quantitative easing (QE) initiatives in response to downturns, like the global financial crisis of 2008–09, the surveyed economists think that monetary policymakers will not be so ebullient the next time the economy needs to be resurrected through easy money policies.
Appearing before the Economic Club of New York, Federal Reserve Chair Jerome Powell conceded that he and his colleagues could have done less.
“We pulled out all the stops,” Mr. Powell stated. “With a benefit of hindsight, could we have done a little bit less and had a little bit of inflation? I guess we could.”
At the same time, officials are refraining from destroying their economic landscapes to return inflation to their target rates. The Fed aims to reduce the annual inflation rate to 2 percent, although there has been some debate among the talking heads that the entity could consider raising this goal to prevent breaking something. However, a chorus of Fed leaders, including Mr. Powell, has routinely dismissed this suggestion.
Tom Orlik, the chief economist at Bloomberg Economics, contends that central banks are attempting to revive their credibility.
Fiscal Risks
Economists also argue that fiscal policy challenges threaten the efforts of monetary authorities, potentially counteracting their work to fight inflation in the United States and elsewhere.The Fed chief told Bloomberg’s David Westin on Oct. 19 that surging debt levels could become a major problem for the central bank, the federal government, and the broader economy.
“The path we’re on is unsustainable, and we'll have to get off that path sooner rather than later,” Mr. Powell said.
In fiscal year 2023, the U.S. government ran a $1.7 trillion federal deficit fueled by higher Social Security, Medicare, and interest spending.
Dependency
Some market observers think that the boat has sailed regarding QE. Financial markets have become too dependent on historically low interest rates in recent years, economists aver. The U.S. economy has enjoyed below-trend rates for much of the last 23 years. From the subprime mortgage meltdown to the COVID pandemic, the benchmark federal funds rate has mostly been under 2 percent.The leading benchmark indexes slipped into a bear market—a 20 percent or more decline—when the rate-setting Federal Open Market Committee (FOMC) began tightening policy. It was not until Mr. Powell signaled in November 2022 that the Fed could be close to winding down its quantitative tightening campaign that stocks rallied on the hint. However, with plenty of uncertainty surrounding the state of monetary policy, the Dow Jones Industrial Average has slumped about 6 percent since July, and the benchmark S&P 500 Index has tumbled close to 7 percent.
Mr. Powell and his colleagues have suggested that the central bank will keep interest rates higher for longer. The September Summary of Economic Projections (SEP) showed that officials forecast rate cuts to be lower than expected later next year.
The specter of higher rates gives the equities arena the jitters because the increase in borrowing costs impact businesses and consumers alike. But the Fed’s low-rate climate resulted in massive gains for stocks, corporate earnings, and household net worth.
According to the Fed’s latest Survey of Consumer Finances (SCF), net worth surged 37 percent, buoyed by stock gains, housing appreciation, and pandemic-era government stimulus. This was the most on record. However, now that conditions have drastically changed—pandemic-era stimulus has been exhausted and interest rates are in restrictive territory—economic pessimism about the future is widespread, the SCF noted.
If the Fed conducted a similar survey in today’s environment, researchers would “find net worth is lower,” Mark Zandi, chief economist of Moody’s Analytics, told CNBC.
