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Have Central Banks Lost Control?

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Have Central Banks Lost Control?

Last week's "Nightmare on Wall St.," which was actually a global meltdown in equities instead of being limited to the US, have people saying out loud what was previously only whispered: "Have the central banks lost control?"

Unprecedented money printing and the implementation of interest rate policies that many economists thought were impossible just a few years ago have failed to deliver on the promise of central banks. The market wonders why it should keep believing any of their forecasts.

Central banks continuously overestimate inflation despite trillions of dollars in stimulus. Markets now wonder if quantitative easing has had any effect at all, beyond over-inflated stock prices, Wall St. bonuses, and executive pay. CNBC quotes Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, as coining the term "quantitative failure" to describe the ineffectiveness of central bank policy. Ordinary people across the world should be wearing shirts saying "$12.3 trillion in stimulus, and I didn't even get this lousy T shirt."

interest rates

The advent of negative interest rates were to supposed to be the "nuclear option" that would finally stimulate a stagnant economy and get inflation pointed back up. Instead, it has constricted bank profits and once again savaged savers who depended on bonds that now have a negative yield.  Negative rates were supposed to force banks to make more (and more risky) loans. But central bank rules that banks have to keep more cash on hand to prevent bailouts have whipsawed the financial sector and made banks less likely, instead of more likely to lend.

The reality of a coming tidal wave of defaults and bankruptcies in the energy and mining sector adds to the banks hesitation to lend more -- they're about to have to take a LOT of write-downs on bad loans.

Central bankers still believe that, despite continuously over-estimating inflation and market activity and little to show for years of quantitative easing, that their models are correct. Their resistance to take into account that the global economy is far more interconnected now than before has the central banks messing with one another's plans.

Perhaps the most glaring example of this was Janet Yellen raising benchmark interest rates by blindly following employment numbers instead of the wider economy, and Kuroda from the Bank of Japan surprising markets by cutting their benchmark rates below zero. Denmark quickly followed suit, and markets began selling off.


While markets were trying to digest this topsy-turvy world, word leaked out that the Fed was telling banks in the US to plan for a possible rate cut into negative territory. This was the tipping point for markets, which went into full-blown panic mode. Some analysts are pointing to this as the week when the curtains were pulled back, and central banks lost control. Steen Jacobsen, chief economist at Saxo Bank described this dawning realization this way: “This week may go down in financial history as the week when central bank planning died—the 2016 version of the fall of the Berlin Wall. It sounds worse than it is, as this was always coming,”

Things aren't helped by the Fed, which still pretends that it will continue raising interest rates. In recent testimony before Congress, Fed chair Janet Yellen would only hint that the Fed would move slower with interest rate hikes. Yellen seems bent on keeping policies that do not reflect the situation "on the ground." The bond market has long since discounted the Fed's ability to raise rates even one more time, much less four times. The latest number from the CME Group's FedWatch tool, which tracks Fed funds rate futures, only gives a one in three chance of ANY rate hike this year. The odds of an April rate hike are only 6%.

The tightening financial conditions mentioned above, where banks are less likely to lend, are having the same effect that a Fed rate hike would. Another actual rate hike would be doubling down on the pressure to the economy. Some at the Fed fear the "ghost of inflation past," where previous Federal Reserve administrations waited too long after inflation began to adjust interest rates. This led to several rate hikes in rapid succession, traumatizing the economy and snuffing out the recovery.

Many economist believe that the Fed and its economic models are living in a past where banks were not global behemoths, and companies weren't exposed to currency risk on several different fronts. Traders and investors are looking around at what the last eight years have brought, and think that perhaps what the central banks say and do have nothing to do with the wider economy.


The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product

About the Author

Everett Millman

Steven Cochran

Precious Metals Market Analyst
BS University of South Florida (2002)

A published writer, Steven's coverage of precious metals goes beyond the daily news to explain how ancillary factors affect the market.

Steven specializes in market analysis with an emphasis on stocks, corporate bonds, and government debt. He writes a monthly review of the precious metals markets for SurvivalBlog.com.

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