The Dow and the S&P 500 have risen roughly 12% from their lows on Feb. 11, as oil prices recovered and economic data showing that the U.S. continues to expand helped calm fears of a recession.
“We don’t think [gains] are going to be nearly as dramatic from here,” said Steve Weeple, who oversees about $6 billion as a global portfolio manager at Standard Life Investments. “The reversal was pretty fast,”
But success is by no means guaranteed. Economics textbooks pinpoint various situations in which monetary policy can fail to work. Even John Maynard Keynes, the father of modern anticyclical-demand management, highlighted certain conditions that could render monetary policy ineffective. As he pointed out, a central bank can expand the money supply all it likes, but if the funds are simply hoarded in the banking system or by households, economic activity doesn’t accelerate....
Loose monetary policy also depends on the credit channel. If businesses and households are reluctant to borrow more, the impact of monetary policy will be muted. The additional liquidity created by QE will remain in the banking system instead of flowing into the real economy.
Subdued credit growth is typical following a financial crisis, including the one in 2008, which in many countries exposed excessive private-sector debt levels. A prolonged period of deleveraging tends to follow, as corporations, banks and households repair their balance sheets. This phase, known as a balance-sheet recession, also renders monetary policy much less effective
As you can see, the revisions generally show a more anemic record of post-recession growth than we thought. From 2011 through last year, the U.S. economy, on average, grew just 2% per year, well below its post-war average of roughly 3% growth.
The post-recession economic growth picture looks even more miserable when you compare this recovery to those the U.S. experienced in every recession following World War II. This chart from the Minneapolis Fed shows GDP growth in the quarters following a recession:
Despite the Bank of Japan 8301 -1.13 % ’s efforts to push down its currency and jump-start the economy with negative interest rates, the yen is up 8% this year and is at its strongest level against the dollar since October 2014. European central bankers are having similar problems containing the strength of the euro and other currencies...
Japan Prime Minister Shinzo Abe promised unprecedented monetary easing upon taking office in late 2012, looking to kick-start growth and spur inflation. Mr. Abe’s handpicked head of the Bank of Japan flooded the economy with cash by kicking off a bond-buying program. The yen fell 37% against the dollar from October 2012 to June 2015....
Similarly, markets have ignored the Bank of Japan’s hints at its monetary-policy meeting this week of more rate cuts to come. Not only has the mechanism transmitting ultraloose policy into the real economy appeared to be broken, but some unconventional policy tools—such as negative interest rates—have been deleterious to banks and rattled financial markets....
Donald Ellenberger, head of multisector strategies at Federated Investors, FII -0.45 % which had $350 billion in assets under management at the end of December, said central banks “have proven remarkably creative devising ways to use monetary policy to try to stimulate the economy.”
He cited the latest stimulus from the ECB on March 10, with the central bank adding nonfinancial corporate debt to their bond-buying list. The move has fueled a rally in corporate bonds and sent yields falling, which helps lower corporate borrowing cost.
“Central banks are experimenting in real time,” he said. “There is no lab for them to practice in.”
The global financial safety net has become increasingly fragmented, making it harder to respond to crises in a world roiled by volatile capital flows, International Monetary Fund staffers warned.
Defenses haven’t kept up with the growth of external debt in recent years, the Washington-based fund said in a report released Thursday. As a result, a system-wide shock could overwhelm the world’s crisis resources, which include nations’ foreign-exchange reserves, central-bank swap lines, regional funds such as the euro area’s European Stability Mechanism, and the IMF itself, the lender said.
Financial cycles have been “growing in amplitude and duration, capital flows have become more volatile, and non-banks have gained importance, altering the nature of systemic risk,” IMF staff said in the report, which was presented to the fund’s executive board on March 7. In a major event, “the needs could exceed the collective resources available,” the fund said.
The corporate buyback binge continues at full tilt. But, perhaps with good reason, investors may be losing faith in its ability to propel share prices.
U.S. companies authorized $158 billion of new stock buyback programs in January and February, according to Birinyi Associates Inc. While there is no guarantee the rest of 2016 will maintain such a pace, it marked the best start to a year since the research firm started tracking this data in 1984.
February, in particular, stood out, as cash-rich companies said they would continue rewarding shareholders rather than investing. It was the fourth strongest month on record. Cisco Systems Inc. CSCO 1.11 % and Gilead Sciences Inc. GILD -0.83 % led the pack with the heftiest announcements.