Searching for Stimulus

by Joseph Joyce

Searching for Stimulus

The global economy seems headed for a slowdown. The IMF now expects global growth this year of 3.3%, a drop of 0.2 of a percentage point from its previous forecast. Growth in the advanced economies is projected to be particularly feeble, with expected U.S. economic growth of 2.2%, growth of 1.3% predicted for the Eurozone , and Japan’s growth anticipated to be 1%. Of course, a breakdown of U.S.-China trade talks, the imposition of new U.S. tariffs on European cars or a disorderly Brexit could disrupt the forecasts. Can government policymakers improve these conditions?

Central banks have limited policy space. In the U.S., the Federal Reserve has made clear that it does not expect to raise the Federal Funds rate this year, and retains the option of lowering it if conditions deteriorate. Some–including one of President Trump’s anticipated nominees to the Board, Stephen Moore–are already calling for lower rates. But the current Federal Funds rate of 2.5% does not give the central bank much scope for lowering it.  Japan’s central bank already has negative nominal rate targets, while the European Central Bank’s policy rates include a lending rate of zero percent and a negative deposit facility return.

If monetary policy is constrained, what else can policymakers do? Adair Turner, former chair of the United Kingdom’s Financial Services Authority, believes that zero interest rates means that the time has come for “massive fiscal expansion” financed by central banks. He acknowledges that excessive monetary growth can be harmful. But, he argues, when faced with “slow growth, political discontent and large inherited debt burdens…”, policy measures that in other times would be seen as radical need to be considered.