How Politics Constrain the Federal Reserve and Other Economists

“Policymakers around the world pulled the easiest lever, which is the monetary lever,” Mr. Perli said. “The more a central bank eases, the less powerful monetary policy becomes. We are at the point where, if we want to accomplish something — especially in countries like Europe — the ball is in the fiscal policy territory.”

But “that’s complicated,” he said, “by budget constraints in some countries and political constraints in other countries.”

While consumer spending is holding up in the United States and growth remains decent, manufacturing is slowing and consumer confidence sank in August. Businesses reported holding off on investment as they waited to see how the trade war plays out.

Mr. Trump has also begun mulling more tax cuts to lift the United States economy, though on Wednesday he insisted that it did not need one right now. And the Fed has room to cut rates, should a recession hit. The challenge is primarily one of intense policy uncertainty.

Europe, by contrast, has negative interest rates and a fraught economic backdrop — and while that owes more to fundamentals and global spillovers than domestic politics, growth is getting little help from national governments. In Germany, where China’s slowdown is hurting the manufacturing sector and the economy contracted in the second quarter, the government has been slow to spend more aggressively. Italy is also struggling, but it already has a heavy debt load, limiting its room to maneuver.

The European Central Bank, which runs monetary policy for 19 European countries, is expected to cut interest rates deeper into negative territory and even consider asset purchases in a bid to protect growth — but it is low on ammunition.

“Monetary policy has done a lot to support the euro area and continues, as you can see today, to do a lot,” Mario Draghi, the outgoing head of the central bank, said at a news conference last month. “But if we continue with this deteriorating outlook, fiscal policy will become of the essence.”

Article source: https://www.nytimes.com/2019/08/22/business/economy/fed-jackson-hole-growth.html?emc=rss&partner=rss