Central Banks around the world need to find innovative ways to help with out the ability to drop interest rates.

As banks across the world try to rescue the economies from the impact of the coronavirus pandemic, they are experimenting with policies that were never before attempted, according to The New York Times.

In the U.S., the Federal Reserve is purchasing municipal debt and corporate bonds and lending to midsize companies, which are approaches it has never taken before but might be necessary for a crisis like the pandemic. The U.S. has officially entered a recession in February.

The Fed “crossed a lot of red lines that had not been crossed before,” said Jerome H. Powell, chair of the Fed. He added, “this is that situation in which you do that, and you figure it out afterward.”

The European Central Bank now accepts downgraded junk bonds as collateral in exchange for cheap loans. It will also double a de facto money printing program to 1.35 trillion euros ($1.5 trillion) to maintain the flow of cheap credit. Meanwhile, the Reserve Bank of Australia is buying government bonds to preserve the rate of three-year debt at a quarter of a percentage point.

“It will be a potential concern as the economy turns around, if that turnaround is less than ideal,” said Donald Kohn, former Fed vice chairman now at the Brookings Institution. “Central banks will have to work hard at supplying the extra push, the extra zip that they’d want to achieve.”

Oliver Harvey, a macroeconomic strategist at Deutsche Bank, is concerned that the flow of cash from central banks at the time of business bankruptcies will create an imbalance between demand and supply, and eventually higher prices.

“The government is handing out $100 bills when there is nowhere open to spend them,” Mr. Harvey said. He noted that food prices were already increasing sharply in Britain, due to “more money chasing after significantly fewer goods and services.”

However, more economists are worried if the central banks will be able to restore the low unemployment numbers and encourage stable inflation with such drastic measures.

“Under current circumstances, when the world came to a full stop in a month, there is no such thing as doing too much,” said Carl Weinberg, chief economist at High Frequency Economics. “If there is inflation, that is a small price to pay. The big social-political-economic problem is the loss of jobs and income.”

See the full report here.


Economics, Finance and Investing