Not long ago, the Federal Reserve would not show its hand when it came to changing interest rates. Today, central banks the world over publicly forecast what rates will be at years down the line. In fact, a whole tool chest once used with reservation has been pushed further than ever before. That includes near-zero interest rates and printing money to buy new assets like government bonds. These tools, once thought of as a ‘crazy aunt’ only let out of the closet now and then, have become the new normal in central banking.
What’s the Big Idea?
The willingness of central banks to regularly use tools once reserved for emergencies demonstrates the dire state of the developed world’s economy as well as government faith in fiscal and monetary policy solutions. European leaders, faced with so few options given the extent of the continent’s sovereign debt crisis, are considering bringing out their own crazy aunt. The powers of the European Central Bank may be expanded to model the Federal Reserve, giving it the power to set interest rates and print currency.