Central bankers may have no quick fix as markets swoon, economy weakens

Wed Oct 15, 2014 9:43pm EDT
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By Howard Schneider

WASHINGTON (Reuters) - Global central bankers, eager to see the economy stand on its own feet, faced the rude reality this week of market turmoil threatening already faltering growth and prolonging world reliance on easy money.

Stocks slumped again on Wednesday pushing S&P 500 losses to almost 8 percent since mid-September. The dollar fell and U.S. bond prices soared after weak Chinese inflation and U.S. producer price and retail sales data fanned fears the world economy could be even weaker than thought.

When stock markets turned south last week after rallying for much of this year, many policymakers initially played that down. In fact, the sell-off could be seen bringing some healthy volatility back to markets that officials worried had become too complacent to risks ranging from tensions surrounding the conflict in Ukraine to the Ebola outbreak.

But the deepening of the sell-off may have put major central banks on their heels, by raising the prospect of the market rout going too far too fast, threatening to hurt confidence and potentially triggering a pullback in spending.

"It reminds me of the massive flight to quality we saw during the (2008) banking crisis, when there were fears that the whole global economy would tip into depression," said Nick Stamenkovic, a strategist at Edinburgh-based RIA Capital Markets.

Economists familiar with central bank policymaking say there is no doubt that officials are worried by the markets' sharp turn for the worse. It is less clear how and when will they respond.

Over the past week investors have pushed back their expected date for an initial Fed rate increase from next summer to late in 2015 or even into 2016.

Ever since the financial crisis hit six years ago, central bankers have been at the forefront of a campaign to save the global economy, slashing rates to zero and pumping trillions of dollars into the world economy via unconventional policies such as buying vast amounts of government debt.   Continued...

The new European Central bank (ECB) headquarters are pictured in Frankfurt, September 11, 2014.  REUTERS/Ralph Orlowski