Big Economic Stimulus Works. And That's a Problem

If the global financial crisis taught economic policy makers anything, it was go early and go hard. The cost of hesitating proved too great. Now the world’s most powerful central banks have expanded bond purchases to about $17 trillion — equivalent to the gross domestic product of China and the U.K. combined — to keep borrowing costs low and boost Covid-ravaged economies. This helped prevent a health emergency from morphing into a financial meltdown. But with growth reviving and vaccines in the works, officials from Washington to Wellington now face an unexpected consequence: They may have been too successful for their own good.

For all the pre-pandemic talk about central banks being out of ammunition, ​​​​​​they were able participants in the nascent recovery. The Federal Reserve took the lead, rapidly slashing interest rates to zero and reviving quantitative easing. These actions were followed by aggressive measures in South Korea, Australia, New Zealand, Thailand, India and Indonesia. The Bank of Japan, which never gave up on stimulus in the first place, prescribed even more medicine. Measures unleashed in Asia went far beyond anything deployed in the region during the 2007-2009 crisis.

Once sacrosanct lines have been crossed with alacrity. Indonesia’s central bank is overtly funding the national deficit, a blurring of institutional independence that once would have sent investors packing for fear of runaway inflation and currency weakness. (After weakening sharply in late March, the rupiah has been fairly stable.) The Philippines made similar moves without being as vocal. Australia and New Zealand embraced QE.