LONDON: If one line of reasoning for the plunge in bank stocks is that monetary policy has lost its punch, investors would do well to recall a law of modern investing: “Don’t fight the Fed.”

As the week draws to a close, some Wall Street economists and strategists say monetary authorities have plenty more tricks up their sleeve — even after more than 635 interest-rate cuts since the financial crisis by Bank of America’s reckoning and with central banks now sitting on more than $23 trillion of assets.

“Time and time again policymakers have shown themselves to be bolder and more inventive than asset markets give them credit for,” Ste­phen Englander, Citigroup’s New York-based global head of Group-of-10 currency stra­tegy, said in a report to clients late on Thursday. “Pessi­mism is unwarranted.”

His proposal is that officials focus their policy more on boosting demand rather than just increasing liquidity in the hope that consumers and companies will find a need for it.

While he thinks targeted lending could help achieve that, he advocates what he calls “cold fusion” in which politicians would cut taxes and boost spending with central banks covering the resulting rise in borrowing by purchasing even more bonds.

“The next generation of policy tools is likely to be designed to act more directly on final demand, using persistently below target inflation as a lever to justify policies that will be anathema otherwise,” Englander said.

In a similar vein, Hans Redeker, head of global foreign- exchange strategy at Morgan Stanley in London, is declaring it’s time for central banks to begin using quantitative easing to buy private assets having previously focused on government debt.

“I would actually look into the next step of the monetary toolbox,” Redeker said in a Bloomberg Television interview. “We need to fight demand deficiency.”

Critics say that’s the source of the problem. There’s little more bond-buying and rate cutting can do to stoke the real economy. And markets, they say, now recognise that.

Part of this week’s pain in markets has stemmed from the concern that the negative interest rates increasingly embraced by the likes of the Bank of Japan and European Central Bank do more harm than good by hitting bank profits.

That hasn’t stopped JPMorgan Chase economists led by Bruce Kasman suggesting central banks could cut much deeper without any major side effects so long as they limit the reserves they are targeting. Citigroup said Thursday that Israel, the Czech Republic, Norway and perhaps Canada could also join the subzero club in the next couple of years.

Bloomberg-The Washington Post Service

Published in Dawn, February 14th, 2016