Are Central Bankers Economic Superheroes?

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Central bankers are increasingly being asked to take on the role of Superman for the world’s economy. Amid fewer and fewer available options, their ability to ward off economic woes is under strain. Yet they are pressing on, as rates worldwide continue to be lowered, and as inflation around the globe is rather dormant, the impetus is to keep monetary policy lax. South Korea cut rates yesterday, marking the 511th global reduction in rates since July 2007. Similarly, the Reserve Bank of Australia cut rates to 2.75 percent, while countries including Japan and the US continued to press on with bond buybacks, expanding their monetary supply.

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A group of seven finance ministers meet in England today to discuss monetary policy, and most analysts are predicting a continuation of what banks have already done. A Morgan Stanley report sent to clients yesterday claimed that “most central banks in our coverage universe still have a bias to ease.”

Stocks have responded positively to furthered central banking measures, with the Dow Jones Industrial Average (^DJI) breaking 15,000 for the first time last week. Supporters of increased liquidity hope that increasingly positive fundamentals in the coming months will reaffirm the ability of central bankers to positively affect the global macroeconomic situation.

However, as stock markets have thrived on the abundance of cash being pumped into economies, growth remains stagnant. This has prompted some analysts, such as Paul Donovan, economist at UBS AG in London, to question whether bankers will really continue their current path. Citing the ECB’s lack of effect on the EU’s current situation, he thinks that “momentum for further easing is inevitably slowing.”‘

There is growing concern though, that central banker’s sway over the markets has made them fragile; when the props for the economy begin to slow, even the slightest move by bankers could send stock markets reeling. Moreover, Andrew Kenningham, an economist at Capital Economics Ltd. in London, notes that variables ranging from household debt to fiscal contraction might offset their ability to spur growth rates past 3 percent, which is below the 4 percent pre-financial crisis average.

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Speaking today on the effects of record low interest rates, U.S. Federal Reserve Chairman Ben Bernanke warned that unless regulators and the private sector work to reduce vulnerability in the shadow banking sector, a run on money market funds remains possible. He also said the Fed was actively watching asset markets for indicators that investors are “reaching for yield” in a way that could affect the stability of the already fragile financial system.

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