The Decade of the Central Bank is Coming to An End

On Nov. 25, 2008, the Federal Reserve launched the shot heard around the financial world.

The central bank announced it would start using digitally created money to buy mortgage debt in an effort to drive down interest rates and resuscitate a dead housing market.


Along with a series of cuts that ultimately would take short-term interest rates close to zero, the move was part of an ambitious gambit to take the country out of its worst economic crisis since the Great Depression. It quickly expanded to the purchase of government bonds in a total of three rounds that spanned six years.

Flash forward 11 years.

The Fed’s campaign of “quantitative easing,” along with keeping rates historically low, coincided with the longest expansion and most robust Wall Street bull market in U.S. history. Coming at a time of prolonged gridlock in Washington, the Fed’s monetary policy moves thrust it front and center as the sole provider of stimulus.

“It was the decade of the central bank,” said Quincy Krosby, chief market strategist at Prudential Financial. “Stimulus was wanting, and the burden fell on the central banks to normalize the environment.”

Economists can and will debate the effectiveness and the long-term consequences of all the extraordinary moves, but there can be little doubt that in the past decade, the epicenter of economic management was at the Fed, along with its sister central banks around the globe.

No collective entity had greater influence for the past 10 years over the economy and financial markets.

‘The extraordinary has become ordinary’

While the desire may have been a normalization of a global economy that had been crushed by a speculative real estate bubble, the measures taken to achieve that goal were anything but normal.

Central banks cut borrowing rates more than 50 times over the past decade and instituted “money printing” QE programs to the tune of nearly $11 trillion just between the Fed, the European Central Bank and the Bank of Japan. Never before had these institutions been called upon by so many to do so much. But lacking other fiscal measures — government spending on capital projects and the like — there was little alternative.

Former Fed Chairman Ben Bernanke even half-joked once that such programs don’t work in theory but do in practice, part of the general reluctance central bankers had to such aggressive intervention. His successor, Janet Yellen, put a halt to the money printing and began the process of gingerly rolling off the bond portfolio acquired through the three rounds. Now, she continues to defend the Fed’s stimulus actions during and after the financial crisis.

“After all, the economic consequences of what we had were really quite terrible,” Yellen said recently at a World Business Forum conference in New York. “This was a very serious thing, but it could have been the Great Depression. My colleagues and I knew that it was on us to figure out what we needed to do to make this the Great Recession rather than the Great Depression.”

- Source, CNBC