From Gavyn Davies, Lessons from recent market turbulence,
What, then are the main lessons from this turbulent period? Several spring to mind.
The global economy is not quite as weak as it appeared early in 2016, though this needs continuous assessment;
The Federal Reserve can readily be dissuaded from tightening monetary policy if global economic conditions deteriorate, or market turbulence returns;
The Fed is not “out of ammo” because actual and forward nominal interest rates are positive and can be impacted by policy statements;
Chinese foreign exchange rate policy may be particularly important in affecting the Fed’s thinking, though it is highly unlikely that any formal “agreement” has been reached between the US and China on currency policy;
Japan is now facing a crisis of confidence in Abenomics that needs to be quickly addressed through monetary, fiscal and exchange rate policy;
The ECB may find it quite difficult to banish deflation risks, since markets no longer seem to be impressed by increases in asset purchase programmes by central banks, at least when bond yields are below zero;
There are very serious disadvantages with negative interest rate policies, which can actually be counter-productive;
Expansionary fiscal policy, and maybe even helicopter money, would probably creep onto the policy agenda if there were a renewed economic downturn in the eurozone and Japan.
It is very good that we are able to look back and learn some important lessons on coordination and spillovers, but now we must look ahead and form prudent strategies, keeping in mind inter-generational effects and global contagion risks.