Central Banks At A Crossroads

Central banks around the world are facing a dilemma.  Do they continue with the previously untried and unproven methods of dealing with their economies, or do they return to a more “normal” way of doing business?

A white paper by Credit Suisse said after the Great Recession hit in 2008, central banks began searching for outside-the-box ways to deal with the financial crisis.  They saw their roles expand to include financial stability and not just the narrow macroeconomic targets of price stability and employment.

They found those new tools in untried and unconventional policy adjustments, many of which worked and some of which have yet to yield their full results.

Now that the recession is fading, the question becomes whether to continue with those unconventional mandates and tactics or to return to a more “normal” way of doing business.

 

NORMALIZATION

 

“In an effort to stimulate credit growth, consumption and investment, central banks introduced a unique series of policy measures that resulted in a manifold expansion of the size of their balance sheets,” the paper said.  They purchased not only government bills but expanded into several types of bonds and equities, resulting in a great deal of influence on asset prices.

Economic experts tend to agree that the innovative actions of the central banks contributed “decisively” to the stabilization of the financial system and prevented a far deeper economic downturn.  But the paper said there is much more controversy about how successful the policies were in promoting economic recovery.

Since lags in policy results may have been longer than usual because of the depth and specifics crisis and other destabilizing forces, it may be too early for a final verdict about normalization.  The acceleration of economic activity since mid-2016 in advanced and developed countries suggests old theories stand a reasonable chance of being disproven.

If proven, the chances that other central banks would follow the US Federal Reserve in gradually normalizing policy would increase greatly, the paper said.

 

THE “NEW NORMS” SCENARIO

 

The alternative would be a scenario in which central bank policy hold with the new mandates and tools for economic and/or political reasons.  Pressures on central banks to maintain an easy stance could continue for some time in some countries, and central banks could move interest rates further into negative territory, for instance.

Such moves could prove technically difficult but popular, making them difficult to unwind.

Alternatively, pressure could intensify in some countries to finance fiscal expansion measures through other new tactics.

This poses certain stability risks for the Eurozone as the members of the common currency are likely to have divergent views about what should and could be done, exposing the area to extra market stress.

In either scenario, especially if zero interest rates are breached more permanently, innovations like digital currencies and other things might gain prominence.  How far banks want to go may depend as much on politics as anything.

 

CASH CATTLE TRADE LOWER

 

Average fed cattle exchange auction prices Wednesday were $3.13 per cwt lower at $118.84, versus $121.97 last week.

Cash cattle then traded at $117 to $120, mostly $119, on a live basis, down $2 to $5.  Dressed-basis trades were $3 to $4 lower at $190 per cwt versus $193 to $194 last week.

The USDA’s choice cutout Thursday was down $0.74 per cwt at $193.01, while select was off $0.23 at $190.62.  The choice/select spread narrowed to $2.39 from $2,90 with 73 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Wednesday was $128.72 per cwt, down $1.00.  This compares with Thursday’s Mar settlement of $123.75, up $1.67.