As the quartet breaks up, central banking leadership
Send a link to a friend
[October 16, 2017]
By Howard Schneider and Leika Kihara
WASHINGTON (Reuters) - The leaders of the
world's top central banks who risked trillions of dollars and their
reputations to rescue the global economy are now set to walk off stage
at a time when the lingering effects of the crisis, evolving technology
and a combustible political landscape will challenge their successors.
The Federal Reserve, the Bank of Japan and the People's Bank of China
may all have new bosses in early 2018 and there will be a new head of
the European Central Bank the following year.
The new leaders will have to deal with the hangover from the 2007-2009
crisis and its immediate aftermath as well as newly emerging risks.
Some $10 trillion in assets bought by the Fed, the ECB and the BOJ to
prop up their economies remains on the books and will have to be pared
back. Stubbornly low global inflation and weak growth complicate the
return to more conventional policies. There are unfinished reforms in
China and Europe, while the rise of nationalism could erode central bank
Further ahead, the spread of cryptocurrencies and other technologies
threatens to weaken central bank control over the financial system.
"The bad news is that in a crisis people learn by doing," said Vincent
Reinhart, chief economist at investment firm Standish Mellon and a
longtime official at the Federal Reserve. "Will the next set of people
have the set of experiences that allows them to do that? Will they have
The changing of the guard could veer in unpredictable directions.
China's president is considering a provincial official to succeed Zhou
Xiaochuan, a veteran policymaker who has led the central bank since 2002
and whom analysts regard as a champion of reforms that could falter
without his leadership.
In the United States, President Donald Trump will have the opportunity
to infuse his "America First" sensibility at the Fed, an institution
with an undeniable global role, when Chair Janet Yellen's term ends in
BOJ Governor Haruhiko Kuroda's shock-and-awe record monetary stimulus
gets credited for helping Japan snap out of years of stagnation. He will
see his term end next April with the economy expected to keep growing,
but inflation still far from his target, fueling doubts about the
overall effectiveness of his policy.
ECB President Mario Draghi will be around until late 2019, but the
succession battle could renew tensions over Britain's departure from the
European Union, ways of aligning the interests of economic superpower
Germany with the rest of Europe, and concerns that the rise of
nationalism could impair the ECB's ability to set monetary policy for 19
"Given the divisions in Europe both politically and economically, you
could have a very large swing in ECB behavior," said Adam Posen,
president of the Peterson Institute for International Economics.
Yellen, Kuroda and Zhou appeared together on Sunday to talk about the
global economy on the sidelines of the International Monetary Fund and
World Bank annual meetings.
It was a "farewell concert" of sorts for a group whose tenure has
transformed central banking.
With rare exceptions, monetary policymakers from different countries
avoid any hint of direct coordination with each other, and primarily
tailor policies to domestic needs. Still, the four in charge now have
shared years at the helm of the global financial system, met and talked
at countless international meetings, and managed a major crisis
Along the way they deployed open-ended central bank asset purchases,
introduced negative interest rates, salvaged the euro zone from a
possible fracture, and steered China, now the world's second largest
economy, toward more openness and currency reforms. Yellen, a top Fed
official since 2004, both helped craft the crisis response and steered
the Fed's to a more conventional policy.
[to top of second column]
Chinese Vice Finance Minister Zhu Guangyao (C) hugs ternational
Monetary Fund (IMF) Managing Director Christine Lagarde as People's
Bank of China Governor Zhou Xiaochuan (L) smiles after G-20 finance
ministers and central bank governors family photo before a plenary
session during the IMF/World Bank annual meetings in Washington,
U.S., October 12, 2017. REUTERS/Yuri Gripas/File Photo
NEW SCORE FOR A NEW BAND
Some continuity is possible. Yellen and particularly Kuroda could be reappointed
when their terms expire next spring, and one of the top candidates to run the
PBOC is cut from the same reformist mold as Zhou, who is expected to retire in
the first half of 2018.
“I am not sure that all three will actually leave," Jeroen Dijsselbloem, the
chairman of euro zone finance ministers, who will himself leave his post in
January, told Reuters.
"In general, losing experience is always a risk. But it is also a fact of life."
But the odds now seem that by early next year the world's two largest economies
will have new and potentially more inward looking, central bank leadership.
Zhou's successor will face an immediate choice of how aggressively to continue
the policy transition toward market-based norms, and how to resolve a suspected
mountain of bad debt on provincial and corporate books.
In the United States, some of the candidates being considered to replace Yellen
are at odds with her on interest rates, inflation, and how to fight severe
Bank of Japan board member Sayuri Shirai said the Fed's smooth transition from
the era of near zero rates and bond buying to one of steadily tighter monetary
policy was a testament to Yellen's steady hand and good communication.
The calm "is attributable to the Fed's improved communications skills with
markets under Yellen's leadership," she said.
Reinhart said that in a sense major central banks are already in a transition as
the current leaders tackle issues in a way that could help make the handoff
Whoever Trump names to run the Fed, for example, will have a clear "gradual"
interest rate path and a balance sheet reduction plan to rely on, at least at
first. Draghi is also expected to reduce the ECB's bond buying and take the
initial steps toward more conventional monetary policy over the remainder of his
term.Zhou set the stage for the renminbi's broader use as a global currency
whose value is determined by market forces, sparing his successor the internal
and international tensions over China's managed exchange rate.
It will be up to the newcomers, though, to be vigilant about new problems.
Financial regulation is still evolving, and few governments appear willing to
tackle high debts and rising entitlement spending, or have successfully
confronted the changing nature of work and wages.
Posen warned that with inflation and interest rates still very low, governments
hamstrung, and financial connections between nations "very dense and
complicated," incoming policymakers won't have a tried and tested playbook.
"We don't yet have the right set of tools and ideas to tackle that."
(Reporting by Howard Schneider and Leika Kihara; Additional reporting by Gernot
Heller, Balazs Koranyi and Jan Strupczewski; Editing by David Chance and Tomasz
[© 2017 Thomson Reuters. All rights
Copyright 2017 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.