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Can Central Banks Fend Off the Next Recession?

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Central banks

As we discussed previously, central banks in developed economies like the US (SPY), Europe (VGK) (VEU), and Japan (EWJ) have adopted a dovish approach. While developed countries’ central banks, except the US, were quite dovish in their approach, they’re even softer about any future rate hike amid the global economic slowdown.

A loose monetary policy is among the tools that support economic growth. In the 2008-2009 financial crisis, there were rate cuts pretty much across the world. Rate cuts and a massive stimulus from governments helped put the global economy back on track.

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Monetary policy

Currently, interest rates are much lower compared to the levels in 2007 before the global recession. Talking about the US, the federal funds rate is less than half the level in 2007. The Fed’s balance sheet is also bloated, which leaves less space for more measures. The picture is pretty much the same across most of the leading economies. Central banks wouldn’t have room to address any major slowdown or a recession.

Fiscal measures

The government’s fiscal deficits are much higher compared to 2007–2008. In the United States, the tax cuts have increased the fiscal deficit. While the tax cuts boosted the economy last year, the impact is fading. The growth rates are expected to taper down this year.

The optimism about a US-China trade deal and an overdone fourth-quarter sell-off lifted the markets this year. Apple (AAPL), NVIDIA (NVDA), Micron (MU), Intel (INTC), Qualcomm (QCOM), and Broadcom (AVGO) have risen 8.5%, 27.3%, 24.6%, 16.5%, 0.61%, and 14.2%, respectively, based on their closing prices on March 15.

Read Key Themes to Watch after a Dismal 2018 to learn more.

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