“The latest round of Fed and ECB meetings are another reminder that in the aftermath of the 2008 financial crisis and the 2010 euro system crisis, central banks are being asked to promise more than they can deliver." - John Makin, AEI

In his latest Economic Outlook, American Enterprise Institute (AEI) economist John Makin writes that anyone expecting the Fed or the European Central Bank (ECB) to effectively deliver relief for the U.S. or European economies will most likely be disappointed.  Despite verbal assurances at meetings earlier this summer that they would take action, neither the Fed nor the ECB have announced concrete measures to address fundamental economic structural problems. This may signify both central banks' lack of confidence in their diminishing ability to spur economic growth.  While stock markets have temporarily rallied, the confidence in the central banks’ ability to induce faster U.S. economic growth and to stabilize the European currency system will most likely lead to disappointment.

Among the key points:

• Although the Fed has announced its aim to reduce America’s unemployment rate and boost economic growth, there is no guarantee that more quantitative easing will effectively stimulate more hiring or investment, especially with the “fiscal cliff” looming at the beginning of 2013.

• With the eurozone falling back into recession, the ECB has promised to do whatever it takes to preserve the euro, but at best, ECB lending programs will provide only temporary relief to borrowers such as Italy and Spain.

• To successfully affect fundamental economic variables, central banks such as the Fed and the ECB need to look toward restructuring US fiscal policy and Europe's flawed monetary system.  After two years of failed efforts, both the Fed and the ECB need to pressure governments to fix their problems and not rely on the central banks.

John Makin is a former consultant to the US Treasury Department, the Congressional Budget Office, and the International Monetary Fund. He can be reached through his research assistant daniel.hanson@aei.org or 202.862.5883.

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