The Future of Monetary Policy Is Asian
(Bloomberg Opinion) -- As the coronavirus pandemic continues, Bloomberg Opinion will be running a series considering the long-term consequences of the crisis. This column is part of a package on monetary policy. For more, see Ferdinando Giugliano on Europe’s last chance at reform and Mohamed El-Erian on creating a sustainable recovery.
The economic fight against the pandemic has thrust Asia to the forefront of the global policy response. Officials there are breaking with precedent more radically than anywhere else. Developments in Asia, beginning with the shutdown of China’s economic engine in January, are reaching into every corner of the world. Central banking may never be the same.
Yes, the Federal Reserve has the most firepower to deploy, thanks to the dollar’s role at the center of the global financial system. And deploy it the Fed has, moving forcefully to slash interest rates to zero, stabilize markets and shore up banks. But this is mostly evolution, not revolution. Chairman Jerome Powell’s steps built on foundations established during the global financial crisis.
For truly dramatic stuff, look across the Pacific. Monetary policy in Asia has gone into territory not charted even in the depths of the Great Recession and the Asian financial meltdown of the late 1990s. In degree and kind, the steps taken by central banks in Asia have been unprecedented, and the influence of their monetary chieftains has never been greater. *****This shift presents itself in two key ways.
One is easy to spot in the flood of announcements from Asian monetary authorities themselves. Officials have taken the axe to rates in countries recently seen as either living in economic nirvana or so enmeshed with China’s ascendancy that they had become euphemisms for growth. Borrowing costs are now microscopic, reaching territory once seen as the preserve of the old industrial powers. The idea that Asia central banks, outside Japan, would engage in a form of quantitative easing was until very recently laughed out of the room. It’s now happening. Policy makers are, appropriately, putting worries about a spike in prices to one side. Demand is collapsing in Asia, just as it is in the West. There’s no inflation in a graveyard. Moreover, disinflation was the dominant trend in the years preceding the coronavirus, a trend that looks entrenched in the absence of any worldwide inflation. Capital Economics, a research consultant, expects deflation in South Korea, Thailand and Taiwan.
The second manifestation of Asia’s enhanced role in the monetary arena is subtler, but no less profound. Fed officials have come to the view that as the center of economic gravity shifts toward Asia, so must events in the region have a greater say over how the Fed thinks about policy. The implications are far reaching.Prior to the past decade, the Fed didn’t care much about the world beyond America's shores. Fair enough; its mandate from Congress is domestic, dedicated to price stability and maximum employment. But what if those two mandates are increasingly shaped by economies abroad — driven by China and the pull it exercises over an entire region and beyond? The speed with which Covid-19 swept the planet and forced the Fed to respond may, in retrospect, be seen as a Waterloo for policy based on purely national parameters.*****Within the Asian hemisphere, no country more epitomizes the global economy's fall from grace than Australia, a place once seen as possessing some elixir that enabled it to sail through almost three decades without a recession. In late 2018, as U.S. President Donald Trump prepared to ramp up his trade war against China, Jerome Powell was asked for his views on the business cycle at a luncheon at the Economic Club of New York. Australia was the only place where the business cycle was dead, he noted, with a tone that suggested the remark was only partly in jest.While Powell’s counterpart at the Reserve Bank of Australia, Philip Lowe, never spoke in such tones, there were plenty in the country who did: Some special new economic model was being hatched that married Asian-style growth with Western political institutions. In reality, the expansion was slowing at the time and the RBA was fretting that inflation was too low and rates would have to head south.
Quantitative easing was floated last year, but scoffed at by those who saw it as an American or European disease. Yet there Australia went, and rapidly too, as the pandemic erupted. On March 19, the RBA cut rates to zero and launched a form of QE aimed at keeping three-year bond yields at 0.25%, an approach that echoes that adopted by the Bank of Japan. The virus may be the epitaph for Australia’s boom, and with it the idea that the country could run a conventional monetary policy.
For sheer magnitude of breaks with the past, though, consider Indonesia, the Philippines and South Korea. The first has an unhappy record of dealing with deep recessions and financial upheaval; the Asian financial crisis toppled a regime and tipped the country into communal warfare. Jakarta is determined to prevent that this time. Bank Indonesia hasn’t cut to zero — its benchmark rate sits at 4.5% — but it has been given the authority to buy government debt in the primary market. The Philippines central bank is buying government debt in the secondary market. The idea in both countries is to give the government more fiscal power to deal with the virus and shore up local currencies; both have current-account deficits, which make them especially vulnerable to a loss of appetite from foreign investors. In Korea, a modern first-world industrial economy, officials undertook bond buying even before taking the benchmark rate to zero.“It’s not surprising to see some emerging market governments seeking to emulate the recourse the U.S., Europe and Japan have to central bank financing — monetization — of their debts,’’ Deutsche Bank AG economists wrote on April 6, in a review of Asian policy. “It is unusual, though, to see central banks accepting this mandate before they have exhausted conventional policies.’’*****The Fed, which had essentially exhausted conventional measures prior to the virus, subsequently embraced the role of central banker to the world. But that client — the world — has changed significantly in recent years. If this customer doesn’t own the bank, it has a pretty significant shareholding.
China accounts for 40% of global economic growth and Asia overall accounts for 70%. China’s economy is eight times the size it was in 2003 when the SARS epidemic struck. This spectacular growth brought with it a realization that what happens in Asia doesn’t stay in Asia. It comes to the U.S. soon enough. Lael Brainard, a Fed governor steeped in international relations, laid out an expansive view of how the Fed should view the world in a series of speeches in 2016. They were contentious then, as my Bloomberg News colleague Craig Torres reported. “What China does matters to the U.S.,’’ Brainard said on Feb. 26 of that year, when challenged. Now, in the era of trade wars and Covid-19, it seems crazy that global perspectives would be anything other than center stage. For its part, China has refrained from reinventing the monetary wheel in response to the health crisis. The People’s Bank of China has continued to steadily steer rates lower, but is wary of the kind of debt buildup that resulted from its stimulus efforts in 2008. Beijing has reduced reserve requirements for lenders and leaned on banks to direct that extra cash to small and medium-sized businesses. Fiscal policy has been relaxed, though less significantly than in the U.S. and Japan. It’s not that the Fed was ignorant or neglectful of global linkages in the past. It stopped increasing rates during the Asian financial crisis and subsequently cut them after the emerging-market rout of that era morphed into a Russian default. But communications were opaque — this was before dot plots and forward guidance — and rarely mentioned the event directly. Now the virus is everywhere in Fed communications.
Transcripts from Federal Open Market Committee meetings during the first half of 2003 show little attention to SARS. To the extent Asia figured much, it was Japanese deflation that occupied the attention of a governor named Ben S. Bernanke. We won’t know how much wattage Covid-19 truly consumed at recent FOMC proceedings until transcripts are released years from now. You can bet your sweet supply chain that it will be more than the 33 times SARS was mentioned in first half of 2003. The Fed may be the world’s financial policeman, but the beat comprises more than a city block.*****As irrevocable as these trends seem, the Fed and the broader college of monetary practitioners need to be wary of a backlash; central banks became a scapegoat for sluggish growth after the financial crisis. Congress, which Fed officials say is the real boss, is parochial by design. To ease fears of mission creep, the Fed could incorporate into its quarterly Summary of Economic Projections a sense of what pace of world growth is required to meet U.S. growth, employment and inflation estimates. A quantifiable guide to the world that so shapes domestic conditions would be extremely useful. It would also acknowledge an unfashionable reality: In an era where globalization is said to be defunct, transnational ties matter more when setting the price of money — not less. And what of Asia’s future? It’s hard to see how these extraordinary steps are unwound anytime soon. Once governments and bondholders get used to a backstop, it’s hard to take away. Policy makers in Indonesia and the Philippines might induce their own domestic “taper tantrums” should they try. At least some of the state subsidies and functions assumed to combat the virus will stay, which means budgets need to be financed. Now that Australia has undertaken QE, how does it withdraw? Does Japan ever withdraw? I’m hearing little or nothing about exit strategies.
Central bank independence doesn’t have a long-established history in Asia. Emergency measures have a way of becoming entrenched as vested interests spring up around them. As for inflation, that has been on a pronounced journey down in Asia. In many instances, the pace of price increases is near the lower end of targets and conceivably will push beneath the goal line. Runaway prices, traditionally thought to follow periods of huge stimulus, is unlikely.
That’s one lesson to take from the West’s recovery from the Great Recession. As much as the Fed takes Asia into account, in this regard at least, Asia looks like America. The region’s seat at the Fed’s high table comes not a moment too soon.
This column does not necessarily reflect the opinion of 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.
For more articles like this, please visit us at bloomberg.com/opinion
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.
