For a decade, Central Banks have been responding to an unprecedented financial meltdown. They are stuck in a quandary that appears to have no end.

While nearing 10 years of expansion, much of that time, even now, has been laden with central bank stimulus. The question is, how will they rebuild their arsenals before the next recession when markets appear to be desperate for loose policy?

European Central Bank

The Eurozone slowdown appears to be accelerating with German GDP now projected at 1% for 2019. This being the case, the European Central Bank (ECB) will likely delay their first hike into 2020. The ECB is running a -.40% rate.

Bank of Japan

The Bank of Japan (BOJ) met this last week and announced they are maintaining their stimulus policy. This comes as no surprise as they continue to contend with low inflation and an aging population. The BOJ has infused trillions of yen into their struggling economy and carry a 0.0% long term rate.

Federal Reserve Bank

The Federal Reserve Bank (FRB) Balance Sheet reduction plan is projected to adjust–Initially targeting to reduce their balance sheet from $4.5T to around $2.5T, they will likely end up closer to $3.5T. The US is currently carrying a balance sheet near $4T and a short-term rate of 2.25%.

These entities are what help us combat the negative effects of a recession. Their use of stimulus during an expansion call into question their ability to stimulate their economies during the next recession. A recession usually calls for balance sheet increases or rate reductions equating to 6%. Current economic conditions are preventing central banks from tightening monetary policy. As a result, the next recession will leave the ECB, BOJ, and FRB without the necessary fire power to react.

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