The Group of 20 has struggled in recent years to maintain its relevancy. But it may have just re-established its worth by laying a foundation for higher interest rates.
G20 finance ministers and central bankers met in Ankara, Turkey on the weekend. The resulting statement exceeded expectations; or at least, it exceeded my expectations. Some reporters seized on the pledge to "restrain from competitive devaluations," language that was re-inserted in the text after a two-year absence. More interesting, I thought, was this line: “Monetary policies will continue to support economic activity consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth.” And then this one: “We note that in line with the improving economic outlook, monetary policy tightening is more likely in some advanced economies.”
Central bankers for years have lamented the impossible task of turning around flawed economies on their own. But, that hasn’t stopped them from trying. Policy rates in many countries now are lower than they were during the financial crisis. I have argued elsewhere that this year's bombardment of monetary stimulus may have done more harm than good. That may be a minority opinion. The International Monetary Fund; Harvard University's Lawrence Summers; and Ray Dalio, head of the world's biggest manager of hedge funds all have encouraged the Federal Reserve to repress the urge to raise the federal funds rate from zero. Neither the global economy nor the financial markets are ready for it, they say.
The G20 statement suggests the men and women who actually oversee the world’s leading economies think otherwise. When the group noted that tighter monetary policy was “more likely in some advanced economies,” it was talking primarily about the United States and to a lesser degree the United Kingdom. Both the Fed chair, Janet Yellen, and the Bank of England governor, Mark Carney, have stated clearly that they think the moment to raise interest rates is nigh. In the case of the Fed, the increase could come as soon as this month. The world’s most important economies declared in Ankara that they, at least, are ready for it.
Investors, however, may still need persuading. “In the current economic environment, with global growth and inflation slowing, the Fed’s decision to normalize interest rates will bring with it considerable risk,” R-Squared Macro Management, an investment manager, warned its clients on September 8th. The G20’s message should inspire confidence. Emerging markets such as India and Indonesia suffered when the Fed signaled the end of quantitative easing in 2013. It might have been easier for such countries to side with the IMF and plead with the US central bank to delay. But they didn’t. Instead, they sent a message that it is time to get over the "taper tantrum" and to exorcise ghosts of the Great Depression. The Fed’s move to end its bond buying program riled financial markets because former chairman Ben Bernanke sprung the idea without preparing investors for it. Yellen and other officials have been talking about a higher fed funds rate for months. And as for the Depression, the sin was taking borrowing costs higher in a steady march. The Fed won’t repeat that mistake. Yellen has stated repeatedly that she doubts the first increase since 2006 will be followed immediately by a second and a third.
It also was encouraging to see finance ministers acknowledge in Turkey that they haven’t been doing their share. "What I think we're all agreeing on is that there does need to be, alongside the very accommodative monetary policy in many countries you see, real structural reforms," George Osborne, the UK chancellor of the exchequer, told Reuters. The G20 promised last year in Australia to enact measures to increase gross domestic product by 2 percent. They got off to a rough start, as global growth probably slowed in 2015. “Preliminary analysis by the international organizations shows that we are making progress towards our commitments and that more effort is needed for implementation,” the statement said.
As they say in the news business, the G20 buried the lead in that sentence. But at least the group isn’t running away from its promises. Finance ministers have set up their bosses to do something positive for the global economy at the Antalya summit in November.