More than 10 years on from the global financial crisis, the monetary policies put in play to bolster economies and the financial system are starting to show their age. 
Henderson Rowe’s Artur Baluszynski said that every tool central bankers have used to revive the economy since 2009 – including quantitative easing (QE) – has been an attempt to modify the behaviour of investors, businesses and consumers.
“If central bankers are successful and manage to alter the behaviour patterns of market participants, the yield curve should steepen,” said the Henderson Rowe research head.
“This means the gap between short-term and long-term yields increases as investors expect stronger growth and higher inflation.”
Flooding the system with cheap money should have kickstarted lending and helped boost inflation.
However, as has been seen recently, he said, that relationship is starting to break down.
Having started earlier and seen sustainable momentum in the economy, the US Federal Reserve began to raise rates in 2017.
Yet, investors were spooked in 2018 as president Donald Trump pursued a harder line on trade with China, prompting the Fed to reverse course this year, but the action taken by central banks has not had the intended impact.
“When the global economy started slowing down due to tariff wars in late 2018, the Federal Reserve began cutting rates, but this time the curve flattened,” explained Baluszynski (pictured).
“The European Central Bank’s recently extended QE and new rate cut had almost no impact on the yield curve.”
He added: “This time, the market is trying to tell central bankers it is the end of the road for traditional monetary policy.”
Unlike in previous years, central bankers now face a number of different challenges than they had done during the crisis.
Europe’s most significant obstacle to reflating its economy, said Baluszynski.
“By taking on a substantial amount of debt pre-2008, some European consumers and corporates brought most of the future growth forward,” he said.
“As a result, future cash flow will be directed towards interest and debt repayments, instead of consumption.”
The European Central Bank (ECB) had maintained its QE practice, but neither of these moves had an impact on reviving the yield curve according to Baluszynski.
The US faces a different problem. With its banking system in a much healthier state, said the Henderson Rowe research head, it faces a demographic challenge.
“The baby boomer mortgage bonanza officially ended with the global financial crisis,” he said. “Most of that generation is now in deleveraging mode, which is understandable. You have to pay off your debt to retire.
“For the younger generation, zero-hour contracts and overhanging student debt means less disposable income, hence a minimal boost to the US economy.”
Nonetheless, $16trn worth of negatively yielding sovereign debt shows that central banks are committed to keeping the cost of money as low as possible.
But if central banks are not able to stimulate domestic economies with zero interest rates, “what are the chances they will do so at negative rates, which are a tax on the banking system”, he said.
“Japanese and European bank share prices are at or around decade lows, reflecting their deteriorating fundamentals and confirming that central banks are reaching limits in terms of their credibility and effectiveness,” Baluszynski explained. “To be blunter, we have now reached the impotence of monetary policy.”
This exact phrase was flagged in the latest edition of the BofA Merrill Lynch Global Fund Manager Survey. According to the widely read survey, 12 per cent of international asset allocators believe “monetary policy impotence” is the biggest tail risk facing markets.
The survey also found that 40 per cent of investors feel that global fiscal policy is too restrictive and that more should be done to boost the economy.
Both outgoing ECB president Mario Draghi and his successor Christine Lagarde have mentioned fiscal stimulus and told politicians not to rely on the central bank to deliver growth, said Baluszynski.
Meanwhile, US president Trump has already launched fiscal stimulus in the form of corporate and individual tax cuts.
“The fragmented eurozone will find it even more challenging to agree on a coordinated fiscal expansion. Let us not forget that as per the Stability and Growth Pact, the EU countries have to maintain a maximum fiscal deficit of 3 per cent of GDP and a public debt below 60 per cent of GDP.”
“Zero or negative interest rates are here to stay until there is a coordinated political solution and not only a monetary one,” Baluszynski concluded.
“The G7 central banks have failed to stir inflation, much less fuel GDP growth. Developed economies will continue to deflate until a proper plan for coordinated fiscal stimulus is agreed.
“While the Fed has not yet reached or even considered negative rates, a more severe recession combined with a lack of political solutions could be a trigger for crossing that threshold.”