Global central banks are springing into action to combat the economic slowdown caused by the outbreak of the new coronavirus, but their rate cuts won’t have the intended impact, according to Mohamed El-Erian.
“We are going to get what I call correlated rather than coordinated action, meaning that everybody will be doing something very similar but it’s not coordinated enough,” El-Erian, chief economic adviser at Allianz Global Investors, told FOX Business’ Maria Bartiromo on Wednesday.
He says central bank interest-rate cuts are “pushing on a string.” El-Erian compared the central bank action to what behavioral scientists call “active inertia,” meaning they are showing that they are doing more to combat the problem, but they are “doing the same thing that doesn’t work.”
The Bank of England cut its key interest rate by 50 basis points to 0.25 percent at an emergency meeting Wednesday, becoming the second major central bank to take such action.
"They understand that it's not enough to cut interest rates, you have to focus on where the pain is,” El-Erian said. Britain's central bank is looking into timely and targeted measures to try and help small- and medium-sized businesses and is also coordinating with Treasury, putting "major emphasis above and below" Wednesday's policy action.
He believes the U.S. urgently needs "a whole of government approach" that first examines what the most vulnerable parts of society are and where the systemic risk lies, then plays defense on that.
Washington should also play offense by promoting sustainable growth and taking the lead in terms of global coordination, he said.
Earlier on Wednesday, European Central Bank head Christine Lagarde said a failure by the region's leaders to act could produce a "scenario that will remind many of us of the 2008 Great Financial Crisis," according to Bloomberg.
The European Central Bank is scheduled to meet on Thursday, and is widely expected to match the rate cuts made by the Federal Reserve and Bank of England. Policymakers have also been floating the possibility of boosting liquidity and credit, according to Lagarde.