Credit Agricole SA’s top economic researcher has been calm and measured in her responses for more than an hour, but becomes animated when the conversation turns to Federal Reserve Chair Janet Yellen and whether U.S. interest rates should be higher.
“Yes, she should have just pushed the button,” says Isabelle Job-Bazille in an interview at the French bank’s Tokyo office on Oct. 12. “It’s a question of making interest rates consistent with fundamentals. Just look at the growth rate in the United States. There’s no reason to maintain interest rates at these very low levels.”
The increased emotion, perhaps exacerbated by a whirlwind schedule since flying in from Paris, reflects Job-Bazille’s concern about the danger of monetary policy being kept too accommodative for too long. Her view on this extends to the European Central Bank and the Bank of Japan. She says they are hitting the limits of what can be achieved with stimulus.
“No one should forget that these policies now have diminished returns, as well as side effects,” says Job-Bazille, 48, who has been chief economist at Credit Agricole since 2013. “There’s the idea that in the end a mis-pricing of risk in overheating markets could promote violent swings and plunge the whole financial system into chronic instability.”
Job-Bazille is not alone in some of her views. Bill Gross, the chief investment officer at Janus Capital Group Inc., has been a staunch critic of low policy rates among global central banks, and wrote this year that the negative rates in places like Europe and Japan effectively turn assets into liabilities. DoubleLine Capital Chief Investment Officer Jeffrey Gundlach said this month that Deutsche Bank AG’s stock slump shows the harm of the policy in Europe. Even Boston Fed President Eric Rosengren has warned that low rates may feed financial bubbles.
At the same time, speculation about looming limits to quantitative easing has reignited in recent weeks. Bloomberg News reported this month that talk at the ECB has turned to tapering as a way to end QE rather than a sudden stop. While that says nothing about the timing of such a move, the fact that an informal consensus is building on an exit strategy is significant.
The BOJ’s policy shift last month to targeting the yield curve from expanding the money supply also stirred talk that officials are concerned about the sustainability of stimulus.
To read more on how central banks may be running out of road, click here.
Job-Bazille, who began her career at Credit Agricole specializing in Japan and Asia in 2000, says it may not be the right time to “withdraw the monetary drip” altogether and that structural reform needs more attention than it’s getting.
“Monetary policy has been overburdened,” she says, warning central bankers against doubling down on stimulus. “Stop everything. Stop and hold.”
Credit Agricole’s local operation is a primary dealer for government securities in Japan. The bank is also a primary dealer in its home market of France, and in Germany. It’s not a primary dealer in the U.S.
Just the anticipation of the unprecedented monetary easing programs from the ECB and BOJ was enough to send local stock markets soaring and currencies tumbling. As they moved further along, slumps in German and Japanese sovereign bond yields to record lows below zero led an unprecedented slide worldwide, with about a third of such debt in developed economies handing investors losses when held to maturity.
The Fed could alleviate some of the pressure on yields by raising its benchmark interest rate for the first time since liftoff from near-zero in December. Global yields have surged this month as the odds of a hike in 2016 implied by Fed fund futures climbed from a coin toss to 66 percent.
Credit Agricole expects action at the Fed’s December gathering, but Job-Bazille is wary that policy makers could delay until next year if risks to markets surface again, even if U.S. growth remains robust. Early this year, worries over a slowdown in China helped put the Fed off a potential hike, and the U.K.’s vote over European Union membership weighed on June and July meetings.
Job-Bazille contends that even liftoff came too late, and central bankers as a whole may have become too cautious following the 2008 financial crisis.
“Their sight has shortened. They are more in a reaction mode,” she says. “This dominance of markets over central banks is dangerous.”
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