How Politics Constrain the Federal Reserve and Other Economists

on Aug23
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German politicians do seem to be cracking open the door to more spending, with Finance Minister Olaf Scholz indicating that the government could make up to $55 billion available. For scope, that is equivalent to a little more than 1 percent of Germany’s economy. The United States’ crisis-era spending package amounted to more than 5 percent of its 2009 gross domestic product, albeit with spending that was spread out over several years.

“This is the best available countercyclical tool in Europe,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, wrote in a research note. But he cautioned against expecting too much. “Politics will slow and could jeopardize the move to fiscal stimulus in Germany.”

Mr. Draghi will not make an appearance at the Wyoming meeting this year, though other European Central Bank leaders will be in attendance.

Like Mr. Powell, Mark Carney, governor of the Bank of England, is paying attention to politically created risks. He warned in a recent BBC interview that a no-deal Brexit would create an “instant” shock. The bank had been setting up for potential rate increases, but investors increasingly expect cuts instead as global growth wanes and trade tensions loom large.

In Australia, the central bank has cut rates to record-low levels as the economy weakens and threats to the nation’s 28-year-old expansion loom large. The threats include precarious household consumption, the broader slowdown in Asia.

Politicians in the nation have passed a tax cut and engaged in infrastructure spending, but they are nevertheless headed for what may be their first budget surplus in more than a decade, underlining the limits to that support. Philip Lowe, the head of the Australian central bank, who speaks on Saturday in Jackson, suggested this month that it would be economically helpful if politicians raised unemployment benefit spending, Bloomberg reported — a policy change that the sitting government opposes.

Economic action might be needed sooner rather than later: Recession signals have been flashing in American bond markets, Japan and South Korea are engaging in their own trade war, and consumer and business confidence have taken a hit in many parts of the world. While recession far from guaranteed, it is looking increasingly likely across a number of economies, including the United States.

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