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Enjoy That 29% Rally? You Have These Folks to Thank

Daniel Moss

(Bloomberg Opinion) -- For all the fears that central banks are out of ammunition, looser monetary policy over the past year provided a vital safety net that enabled stocks to surge and wiped out fears of recession. As 2020 unfolds, expect more easing.

The year is barely a week old and already we have some indication about how things will unfold. In minutes released Friday, the Federal Reserve left little doubt that policymakers are more likely to cut than raise rates over the next several months: Inflation is still too low. Two days earlier, the People’s Bank of China reduced the amount lenders must keep in reserve and signaled further steps to lower borrowing costs for companies. Bank of Korea Governor Lee Ju-yeol predicted another year of sub-par growth while Singapore’s gross domestic product for 2019 rose at the slowest pace in a decade, the government said Thursday.  

Last year, central banks provided just enough easing to put a floor under growth. Interest-rate cuts from the Fed, renewed quantitative easing by the European Central Bank, and reserve-requirement reductions by the PBOC helped investors to look past slowing global growth and the corrosive influence of trade wars. The S&P 500 climbed 29% for the year, the most since 2013.

The PBOC’s action last week indicates that the world’s second-largest economy faces significant challenges in the year ahead. China is trying to bring down the cost of borrowing for companies and offset a liquidity crunch exacerbated by rising local-government debt sales and holiday-driven demand for cash. While factory activity has gained for two months, the expansion is anemic and follows a six-month contraction. 

There’s even enough to second-guess bullishness in the U.S. economy. Growth is projected to slip to 1.8% in 2020, according to economists surveyed by Bloomberg, down from 2.3% last year and 2.9% in 2018. Manufacturing has contracted for five straight months, as measured by the Institute for Supply Management.

To be sure, the U.S. consumer has been resilient, buoyed by the lowest unemployment rate in half a century. Holiday shopping set records with the help of online purchases. But confidence dropped for the fourth time in five months in December; expectations for jobs and income slipped. My own visits to Denver-area malls in late December, showed the vulnerability: Stores were busy, but not as jammed as I have seen them in the past. I was surprised by the discounts advertised before Dec. 25.

At a conference over the weekend, former Fed Chair Janet Yellen flagged concerns about secular stagnation in the U.S., saying an aging population and poor productivity will constrain growth. Former European Central Bank President Mario Draghi complained that tight fiscal policy is holding the region back. And just as the global economy appears to be bottoming out, a U.S. airstrike that killed a top Iranian general threatens to jolt confidence.  

Just months ago, serious people began to wonder whether the era of modern central banking as we know it had ended. With a growing list of crises, these institutions have become indispensable as ever. They steadied the ship and will do so again. 

To contact the author of this story: Daniel Moss at dmoss@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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