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The finance minister stole the Bank of Canada’s thunder and violated etiquette by directly commenting on monetary policy. “There was broad international agreement that, with interest rates approaching zero, monetary policy is running out of bullets,” Freeland said, reflecting on the recent annual meetings of the International Monetary Fund and World Bank. “That puts the onus squarely on fiscal policy to grow our way out of this recession.”
That’s not the message Macklem sent earlier in the day, when he said that monetary policy still had lots of pop. “There is scope to do more, and if we need to do more we will do more,” he said.
Central banks aren’t “out of bullets,” leaving governments with no choice but to spend like mad. For example, the Reserve Bank of Australia unleashed a new volley on Nov. 3, including a promise to purchase bonds worth 100 billion Australian dollars. The Bank of Canada could still do any number of things, according to its official “toolkit” of emergency policies: boost the size of its bond purchases; target those purchases in such a way that would lower specific interest rates along the yield curve; encourage banks to lend to smaller companies; or even drop the benchmark interest rate below zero, as some European central banks have done.
The problem isn’t that central banks lack ammunition, but that they don’t develop vaccines, operate hospitals, administer unemployment insurance or make investment decisions. At times like these, government spending has to fill the void because companies and households either can’t or won’t. As Gita Gopinath, chief economist at the International Monetary Fund, pointed out this week, governments must run up debt to break out of a “global liquidity trap,” a condition where interest rates aren’t a barrier to investment because they are already plenty low.
