With central banks' normalisation at risk, governments need to step up

A MORE accommodative Federal Reserve is usually good news for risk markets, but the US central bank's softer stance in the midst of the recent market downturns is reason for concern.

When the powerful Fed hesitates despite its desire to normalise policy, it may be a sign that too much reliance has been placed on the central bank to revive a battered economy. The monetary policymakers in Europe and Japan will not be far behind. The governments of the United States, Europe and Japan will need to provide fiscal and structural support for their economies if they want to avert decades in limbo for their central banks.

The problem with a more dovish Fed at this time is that the Fed has not yet reached its goal of normalising policy. The short-term interest rate target is currently between 2.25 per cent and 2.5 per cent, which leaves the Fed still uncomfortably close to the zero interest rate lower policy bound, below which it may have to go back to the costly realm of quantitative easing. The Fed's bloated balance sheet, amassed through years of quantitative easing, has also yet to be fully unwound. With its arms still tied by those remaining tendrils of the last financial crisis, the Fed will find it harder to lift the economy out of the next crisis.