published Jun 16th 2016, 6:00 pm, by Rich Miller

(Bloomberg) —
From the immediate possibility of Britain leaving the European Union to the longer-term consequences of aging populations, the world’s major central banks this week just aren’t sure what to do next.

Officials from the U.S., Japan, the U.K. and Switzerland all opted to keep monetary policy unchanged this week as they await the June 23 Brexit vote and try to make better sense of the deep-seated forces shaping their economies.

“We are quite uncertain about where rates are heading in the longer term,” Federal Reserve Chair Janet Yellen told reporters on Wednesday, noting that an aging society and lagging productivity growth suggested borrowing costs should be below historical normal levels.

The lack of action by four of the most prominent central banks fueled perceptions among investors that monetary policy makers are increasingly at a loss about what to do in the face of a struggling global economy and distorted world financial markets.

That feeling, coupled with worries about the fallout should the U.K. opt out of the EU, sent world stock prices skidding lower this week and drove bond yields down, in some cases into once-unheard-of negative territory.

Risk Averse

“It’s clearly risk-off for investors right now,” Susan Long McAndrews, a partner at investor Pantheon Ventures Inc. in San Francisco, said on Bloomberg Television on Thursday. “Markets don’t like the uncertainty.”

Yellen said the U.K. referendum was a reason why the Federal Open Market Committee chose to hold rates steady on Wednesday.

“It is a decision that could have consequences for economic and financial conditions in global financial markets,” she said of the U.K. vote. It also “could have consequences in turn for the U.S. economic outlook.”

Japan and Switzerland could potentially see an economically damaging surge in their currencies if the U.K. elects not to remain in the EU. It’s “possible that we’ll have turbulences” in reaction to a Brexit, Swiss National Bank President Thomas Jordan said in a Bloomberg Television interview Thursday. Officials from major central banks could act in global markets to prevent any “exaggerations,” he added.

Former Bank of England policy maker Adam Posen said the U.K. will probably face a currency crisis if it votes to pull out of the EU.

While the central bank might first try to support the economy by easing credit, Posen said at a conference Wednesday that it would eventually have to raise interest rates to restore confidence in the pound.

“The odds are you get capital flight and an interest rate hike and a recession,” said Posen, who is now president of the Peterson Institute for International Economics in Washington.

Brexit isn’t the only uncertainty central bankers are grappling with.

Monetary Setting

Yellen said the Fed is trying to figure out the best monetary-policy setting for an economy that is approaching full employment and where inflation is forecast to rise back to its 2 percent target eventually.

Since raising rates from near-zero in December, the U.S. central bank has kept policy steady for four straight meetings.

The Fed chief in the past has ascribed the low level of rates mainly to lingering headwinds from the financial crisis — tight mortgage credit, for instance — and suggested that such factors would dissipate over time.

On Wednesday, though, she also pointed to more permanent forces that could hold down rates for longer, namely, slow productivity growth and aging societies, in the U.S. and throughout much of the world.

Rates may be depressed by “factors that are not going to be rapidly disappearing, but will be part of the new normal,” she said at an hour-long press conference in which she uttered the words “uncertain” or “uncertainty” 11 times.

Kuroda’s Challenges

Bank of Japan Governor Haruhiko Kuroda has even bigger problems to deal with. The BOJ’s balance sheet now amounts to more than 80 percent of gross domestic product, far more than for the Fed, yet Kuroda has made little progress in lifting the country’s too-low inflation rate.

Further compounding his difficulties: A more than 15 percent rise in the yen this year in spite of the BOJ’s decision in January to push short-term rates below zero.

With the Japanese currency soaring to its strongest in almost two years after the BOJ held policy steady on Thursday, Kuroda told reporters in Tokyo that the central bank won’t hesitate to take action if needed.

He also said the central bank was carefully monitoring moves in financial markets and was in touch with counterparts including the Bank of England.

Still, the BOJ may not have the power to break the economy clear from a deflationary cycle, said Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

“They really are in dangerous territory on the exchange-rate front,” he said. “If they make any more policy errors or missteps, or they don’t jawbone correctly, the real economic damage could be quite significant at a time the economy is already weak.”

–With assistance from Enda Curran and Jeff Black. To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net To contact the editors responsible for this story: Carlos Torres at ctorres2@bloomberg.net Scott Lanman, Brendan Murray
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