• ECONOMY
• Updated August 3, 2012, 4:50 a.m. ET

Holding Fire—for Now—but Laying Plans

Central Bankers Feel Political Pressure as They Seek Solutions to Slow U.S. Growth, Europe's Debt Crisis  

 

By JON HILSENRATH

Ben Bernanke and Mario Draghi, with words but not yet actions, demonstrated this week that they are on red alert about the global economy.

Expectations are now high that Mr. Bernanke's Federal Reserve and Mr. Draghi's European Central Bank will act soon to address those worries. But both face immense tactical and political challenges and neither has a handbook to follow.

The stakes are higher for Mr. Draghi. He is in his first year of an eight-year term as the ECB's leader, much of the euro area is in recession and the currency he oversees is imperiled—in part by fights among European politicians. Mr. Bernanke has only 17 months left before the end of his second four-year term, likely to be his last. The U.S. economy is growing, but too slowly to bring down high unemployment—and elected politicians aren't offering much help either.

 

Both appear to be on a path toward expanding their balance sheets with large-scale purchases of debt from private investors. They are also exploring innovative monetary tools now that they have driven short-term interest rates, once their primary lever, nearly as low as they can go.

Many of today's central bankers are chastened because their efforts to drive the global economy out of recession haven't worked well.

"By normal standards and by what they would have expected a couple of years ago, they really pulled out all of the stops and now for the third year in a row it looks like the recovery hasn't got legs," said economist John Makin of the American Enterprise Institute. "They were confident they had a lot of tools to use, they used them, and the results have not been very heartening."

Mr. Draghi and Mr. Bernanke face different economic challenges. If Mr. Bernanke buys more mortgage bonds, as many expect, he would be aiming to lower mortgage and other private-sector borrowing costs to help spur growth. He would also be hoping to give the stock market a boost. The U.S. government is borrowing heavily at record-low rates and doesn't need the Fed's help.

Mr. Draghi, in contrast, is looking for a way to bring down the very high interest rates the Spanish and Italian governments are paying—without letting politicians there off the hook for economic and fiscal fixes that only they can manage.

Mr. Bernanke is stuck with inconvenient timing: a national election three months away. Democrats are urging him to act—and quickly. Republicans are doing the opposite. If Mr. Bernanke moves at the Fed's Sept. 12-13 policy meeting, as many investors expect, he will surely be accused by Republicans of trying to goose the economy and markets to help President Barack Obama's re-election.

As tough as U.S. politics are for the Fed, Mr. Draghi's are tougher. One taboo in economics is for a central bank to print money to finance government budget deficits, because doing so risks fueling fiscal profligacy and inflation. The ECB's charter forbids it and the Bundesbank strongly opposes any move in that direction.

Mr. Draghi's challenge is to preserve the euro without crossing the line into printing money to finance deficits. Both central bankers have already blurred those lines in their responses to financial crisis and recession. In this instance, Mr. Draghi is trying to emphasize that any ECB bond-buying would be aimed at maintaining financial stability and stable prices—not bailing anyone out. The solution he pointed to Thursday: The ECB will buy short-term government debt, but only after countries have asked for help from regional rescue programs that will come with strict conditions.

Mr. Bernanke and Mr. Draghi—both economists with doctorates from the Massachusetts Institute of Technology—are in this position in part because they are among the only economic policy makers in their respective regions who are in a position to act.

Mr. Obama and a divided Congress have failed to agree on a budget plan that might stimulate the U.S. economy in the short run and rein in deficits in the long run, as Mr. Bernanke has urged. European policy makers haven't been able to address deficits that investors see as unsustainable or to strengthen their weakened banking system.

Amid these and other challenges, tThe two men are moving cautiously. Investors were disappointed that they didn't pair their blunt talk with action. As stock markets sold off Wednesday and Thursday, the message investors sent back to the two central bankers was clear: The public has doubts that strong words will turn into real solutions for two of the world's most important economic engines.

But the two are not alone. China's central bank, also with words, not actions, said Thursday that it would make stabilizing economic growth a higher priority amid rising worries about a slowdown there, suggesting it, too, may soon take new measures to boost growth.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

Corrections & Amplifications 
John Makin is an economist at the American Enterprise Institute. An earlier version of this article incorrectly said he was also affiliated with Caxton Associates. He retired from Caxton in 2010.