Three major central banks met this week — and markets barely stirred. The US Federal Reserve raised interest rates for the third time this year and laid the ground for further tightening. The European Central Bank left its stimulus policies in place but confirmed plans to scale back asset purchases from next month. The Bank of England paused after its November rate rise, but signalled that interest rates were likely to rise again next year.
The lack of reaction to seemingly imminent tightening is worth celebrating. Investors no longer hang on central bankers’ every word because, after the greatest firefighting operation in generations, most major economies are in decent health and monetary policy has of late become more predictable.
In the US, the outgoing Fed chair Janet Yellen has overseen the economy’s return to full employment — accompanied, at last, by rising wages. She has also proved more deft than her predecessor at putting the Fed’s vast programme of quantitative easing into reverse without unsettling markets.
In the EU, Mario Draghi deserves enormous credit for overcoming resistance to radical policies that are now starting to bear fruit: unemployment is falling across the eurozone and the latest data suggest the bloc is growing at its fastest pace in seven years. Periphery economies such as Spain, Portugal and even Greece are on the mend. Neighbouring Iceland — an early casualty of the 2008 crash — has lifted capital controls and is regaining its standing in international markets.
The outlook for the UK is less benign, thanks to the uncertainties attending Brexit. But the global upswing is at least cushioning the blow and Mark Carney, the BoE governor, can argue that the central bank is now a supporting actor in the drama, not the protagonist.
However, central bankers cannot rest on their laurels. The decisions they must take next year, over the pace and extent of tightening, will be fiercely contested, and they will be complicated by the uneven nature of the recovery, in the eurozone in particular.
Meanwhile, the direction of policy is likely to become less predictable for investors, with a wave of new appointments at the Fed and speculation already beginning over who might succeed Mr Draghi at the ECB in 2019.
On one side of the debate, the worry is that withdrawing stimulus too early, in the name of “normalisation”, will choke off growth, or trigger big falls in asset prices and renewed debt problems. On the other side, the concern is that an extended period of ultra loose policy is allowing risks to build up in the financial system that could generate the next crisis — and that central banks might have no ammunition left to fight it when it struck.
For monetary policymakers, tightening too fast looks like the bigger risk, given the stubborn absence of inflationary pressures. The Fed has chosen to embark on a tightening cycle trusting that higher inflation will follow the improvement in jobs and growth. There is not much sign of it yet. The ECB’s latest forecasts show inflation still below target in 2020, even if interest rates remain at historic lows.
All the more reason, though, for central banks to use the macroprudential tools at their disposal to contain financial risks and stop asset prices overheating. Jay Powell, the new Fed chair, and Randal Quarles, its new supervisory chief, should not be too quick to deregulate. The ECB has a fight on its hands to force banks to tackle the crisis legacy of bad loans: it must press on.
Central banks, much maligned in recent years, can now claim success for their unorthodox policies. But their job is not about to become any easier.