Central banks face a year of mounting challenges GlobeBusiness
in the wholesale funding, or repo, market – a sophisticated and highly specialized market segment that involves close interaction between the Fed and the banking system.
This is not to suggest that central banks’ objectives weren’t at risk on each occasion. In both cases, generalized financial-market dislocations could have undermined economic growth and stable inflation, creating the conditions for an even more acute monetary-policy intervention down the road. That is why the Fed, in particular, couched its policy U-turn in terms of “insurance.”
But the challenges facing central bankers do not stop there. By allowing financial markets again to dictate monetary-policy changes, both the ECB and the Fed poured more fuel on a fire that has been raging for years. Financial markets have been driven from one record high to another, regardless of the underlying economic fundamentals, because traders and investors have been conditioned to believe that central banks are their BFFs .
Yet, given mounting medium-term uncertainties, central bankers cannot assume tranquil conditions in 2020. While ample and predictable liquidity can help calm markets, it does not remove existing barriers to sustained and inclusive growth. The euro zone economy in particular is currently saddled with structural impediments that are eroding productivity growth. And there are deep long-term structural uncertainties stemming from climate change, technological disruptions and demographic trends.
Moreover, around the world there has been a generalized loss of trust in institutions and expert opinion, as well as a deep sense of marginalization and alienation among significant segments of society. Political polarization is more intense, and many democracies are undergoing uncertain transitions. Also, although the trade tensions between the United States and China have been temporarily alleviated by a “Phase 1” deal, the underlying sources of conflict have hardly been resolved.
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