“Financial markets tumbled around the world this week over concern that central banks won’t ease monetary policy any further.
But while it is questionable what they should do, the central banks will likely take the plunge into easing, says Mohamed El-Erian, CEO of money management titan Pimco.
The central banks are in a difficult spot, he writes in a blog on CNBC. “They are dealing with what Federal Reserve Chairman Bernanke correctly called an ‘unusually uncertain outlook.’ They are forced to use blunt tools. They receive very little support from other government agencies.”
The cost-benefit score sheet of easing is beginning to shift toward the cost side, El-Erian says.
“When push comes to shove, however, we suspect that central banks may ultimately resort yet again to their printing presses, especially if meaningful economic and financial weaknesses reappear,” he writes.
It’s not that the central banks necessarily want to ease further, El-Erian says. “But they also feel that, for many reasons, they cannot be seen to stand on the sideline while politicians bicker, other agencies dither, and the economy stumbles.”
To be sure, some economists think that in the Fed’s case, it already has moved too far in its accommodative policy.
“It’s time to think about producing more normal interest rates,” Yale University economist Steve Roach tells Bloomberg.
“We don’t need to inject more liquidity into banks that are unable to convince consumers to borrow.”
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