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The quarreling elites gathered at Davos agreed on at least one thing about the world’s central bankers: they’re going to have a hard time getting out of the cul-de-sac of their own making.
Last year’s fresh round of interest-rate cuts won fans at the annual meeting of the World Economic Forum for stabilizing global growth and spurring stock rallies. But they also drew criticism from European bankers agitated by negative borrowing costs and some investors wary of looming asset bubbles.
Whichever view bears out, the cost of money is likely to remain cheap well into another decade after years of firefighting.
“The world of central banks is predicting accommodative policy for quite some time,” International Monetary Fund Managing Director Kristalina Georgieva told Bloomberg Television on Thursday.The newest member of the club, European Central Bank President Christine Lagarde, and Bank of Japan Govenor Haruhiko Kuroda join the debate on Friday when they appear with German Finance Minister Olaf Scholz on one of the closing panels at the gathering in the Swiss Alps. They do so with the MSCI World Index up 41% since last January, in part because of their 2019 response as the world economy slumped to its weakest since the financial crisis.Bridgewater Associates co-chief investment officer Bob Prince went as far as to suggest “we’ve probably seen the end of the boom-bust cycle” given how policy makers raced to the rescue of demand hit by the U.S-China trade war.On the other hand, Scott Minerd of Guggenheim Partners warned loose monetary policies had led to a “Ponzi scheme” in credit markets that will eventually collapse. He said the current environment reminds him of the eve of the 2001 recession. Mark Machin, chief executive officer of the Canada Pension Plan Investment Board, said “I do ring the alarm bell on not to be too invested in illiquid assets.”
European bankers were frustrated with the ECB’s deployment of negative rates, which they argue has cost them billions. UBS Group AG Chairman Axel Weber called sub-zero rates a “distortion” and ABN Amro Bank NV CEO Kees van Dijkhuizen said they were “not a good place to be.”Others were less criticial but still wary. Markets are “priced pretty much for perfection,” Moelis & Co. founder Ken Moelis said. Barclays Plc’s Jes Staley said “asset valuations are overall quite high” especially in the technology sector.
Summing up the majority view, Staley told Bloomberg Television that with rates so low “almost by definition you’re going to have asset bubbles.”“You want to ride that wave while its happening but keep your eyes wide open for when there is a correction,” he said, adding central banks would struggle to tackle an inflation breakout.
History is sure to repeat itself, said Harvard University professor Carmen Reinhart, co-author of the bestseller “This Time is Different.”“We never leave the boom-bust cycle,” she said. “Maybe in five years we’ll not be talking about the sub-prime bubble, but the equity bubble.”
What Bloomberg’s Economists Say:
“Risks to global growth are down. Alas, global growth is not yet up - indeed the IMF has just lowered its forecast for the year. Warnings about the cost of low and negative rates to savers and to financial stability will continue. Absent surer signs of a recovery, central banks won’t be able to do anything about it.“
--Tom Orlik, chief economist
The argument of central bankers will be that they did what was needed to meet their inflation targets and avert a recession. Asset prices bear monitoring and negative rates are a legitimate tool of policy that brings benefits for banks as well as costs, their case goes.But don’t expect a change in policy settings any time soon. Lagarde’s ECB on Thursday left rates on hold, while Kuroda’s BOJ on Tuesday pushed back against speculation it may start normalizing soon.The Federal Reserve, which isn’t represented in Davos, is set to next week leave the benchmark interest rate at 1.5%-1.75% after three reductions last year. Some investors argue its recent buying of short-term bonds to ease money market strains amounts to quantitative easing, something it denies.
The IMF’s Georgieva struck a note that Lagarde and Kuroda may echo Friday in calling for governments to do more. They will be joined on their panel at 11:30 a.m. in Davos by U.S. Treasury Secretary Steven Mnuchin and German Finance Minister Olaf Scholz.
“We are keen to see governments stepping up on the policy front,” said Georgieva. “Monetary policy has served us well. It can’t be the only savior.”JPMorgan Chase & Co. President Jamie Dimon said fiscal and monetary policy makers will need to do even more together in the future.“We have to have coordinated fiscal, monetary policy and regulatory policy,” Dimon told CNBC. “It’s very hard for central banks to forever make up for bad policy elsewhere and that puts them in a trap and we are a little bit in that trap today.”
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