Central banks’ repeated warnings that there are limits to what they can do to bolster the sputtering world economy could suggest they are about to pull back and pass the baton to governments.
But a steady flow of research and a new tone in the debate among policymakers and advisers points in a different direction: rather than retreat, central banks are preparing for the day they may need to do more, even at the risk of antagonising politicians who argue they already have too much power.
The shift can be seen in the acknowledgement by Federal Reserve policymakers that their massive $4tn balance sheet will not shrink anytime soon, or that asset buying may become a “recurrent” tool of future monetary policy.
It can be seen in the comments of Bank of England officials who talk of crisis-fighting tools as now semi-permanent fixtures, or in the Bank of Japan developing a new monetary policy framework, in this case targeting long-term market interest rates.
Driving those developments is an emerging consensus among policymakers who now acknowledge that the global financial crisis has led to a fundamental shift toward low inflation, tepid growth, lagging productivity and interest rates stuck near zero.
“We could be stuck in a new longer-run equilibrium characterised by sluggish growth and recurrent reliance on unconventional monetary policy,” Fed vice chair Stanley Fischer said recently.
For years, Federal reserve and other policymakers have discounted such a scenario, arguing that temporary factors were slowing the recovery and plotting a return to conventional pre-crisis policies.
Over the past months, though, that optimism has given way to an admission that such a return is increasingly elusive.
Interest rates are set to stay low far longer than thought only a year ago and jumbo balance sheets accumulated through crisis-era asset purchases are now cast as a possibly permanent tool.
At the annual Jackson Hole Fed conference in August, the discussion had shifted from the mechanics and timing of “normalisation”, to how and whether to expand the central bank footprint yet again.
Policymakers still keep reminding governments they should help boost productivity and growth with reforms and, where possible, spending on infrastructure.
But there has been a growing recognition among central bankers that they may not be able to simply hand the problem off, and that now is the time to lay the groundwork for more aggressive policies that may be needed down the road.
Existing tools may not be enough “to deal with deep and prolonged economic downturns”, Yellen said in Jackson Hole.
She has since flagged the possibility that in a future downturn the Fed might need to start buying private securities and not just government bonds, a step already taken in Europe.
During the recent International Monetary Fund meeting, its officials even challenged the decades-old consensus about the separation between monetary and fiscal policy, suggesting central bankers should support government infrastructure spending with low borrowing rates.