Can't blame central banks without fiscal policy: AIMCo's Mark Wiseman
Coordination among the world's largest central banks is nearly impossible, according to the chair of one of Canada’s largest institutional investors, due to each of the three major global economic zones facing different circumstances.
Amid persistent inflation, the world's central banks have two options, Mark Wiseman, chair of the Alberta Investment Management Corp. (AIMCo), said in a television interview Wednesday.
The first option is to aggressively raise interest rates to control inflation, Wiseman said, which could put an economy into a “very deep and potentially prolonged recession.”
The other option is to accept longer-term inflation above the current two per cent target held by many central banks. However, Wiseman said when inflation is entrenched in an economy it causes “a whole other set of problems.”
“And this talk of coordination is almost impossible because you have the three major blocs, [the] economic blocs in the world, all in a different situation,” Wiseman said.
The three major economic blocs, North America, Europe and China, all face unique challenges according to Wiseman.
“You've obviously got North America which has an inflationary problem,” he said, adding that the Bank of Canada and U.S. Federal Reserve are likely to continue aggressive interest rate hikes.
For Europe, in addition to inflation, Wiseman said there are structural problems stemming from the war in Ukraine, including energy issues preventing European central banks from raising interest rates.
“They've got a problem that they really don't have the levers to pull that that the Bank of Canada [and] the U.S. Fed has,” he said.
As the Chinese Communist Party’s national congress approaches in mid-October, policymakers will have to stimulate the economy to tackle “flaccid economic growth,” Wiseman said.
“You've got the three major economic zones in the world, all pursuing different paths because they have to, and that's a bad thing. It's a bad thing because it creates disequilibrium in markets, in currency markets and equity markets, and asset pricing generally,” he said.
Amid economic uncertainty, Wiseman said investors should “hold on tight,” by lowering risk appetites and adjusting portfolios.
Specifically, Wiseman points to treasuries.
“Nobody wanted to hold treasuries a couple of years ago because basically, you're making zero. Now you can make at least a nominal return on treasuries, not a real return today, but at least a nominal return on treasuries,” he said.