After years of loose monetary policy, the money presses in several of the world’s biggest markets are finally winding down – if not yet falling silent.
In the US, the era of easy money is already over.
But with a huge $4.5 trillion of assets to return to global stock markets, it has always been assumed the process of unwinding QE will be “slow and gradual”.
Certainly in Britain there is no end in sight to the monetary stimulus. The UK economy is forecast to grow by a meagre 1.5% this year and the Bank of England, despite raising interest rates in November, remains very doveish.
There may be a further hike in interest rates before the end of this year, but trying to predict when interest rates will rise in Britain has long been a fool’s errand. In any case, everything in Britain hinges on Brexit, not to mention who the next Governor of the Bank is.
That leaves Europe, where the European Central Bank (ECB) has been reasonably clear on its position. It has already cut its asset purchases facility in half from €60 billion per month to €30 billion per month.
The ECB will then, over the course of the year, most likely assess the impact reducing economic stimulus has on the economy before deciding whether to end it altogether in September.
So, we’re not at the end of easy money quite yet. More the beginning of the end.
But how the end is handled will be the real test, both of monetary policy and for the global economy as a whole.
Unwind QE too fast and there is a risk the global economy will take a tumble. Unwind too slowly, or not at all, and the global stock market rally could accelerate out of control – and finally snap.
One of the things markets are most worried about is the changes in personnel coming later this year.
If his predecessor’s last year or so is anything to go by, speculation over who will replace Mr Carney has already begun. The beauty parade of candidates will be assessed over the course of the next twelve months and is likely to use up significant column inches. We should also all be braced for calls for the next Governor to be a Brexiteer.
Analysts naturally expect central banks to become more hawkish over the course of this and next year; what concerns them is the possibility that they become too hawkish for the global economy to handle because of either hubris or ideology.
Some analysts are already forecasting four interest rate hikes in the US this year – more than fixed income markets and most economists are currently expecting.
And what if the ECB decides by the end of the year that it cannot wait any longer to hike rates, given the possible level of divergence between European and US monetary policy come the Autumn?
Being able to take positions in anticipation of monetary policy is something markets pride themselves on. This means understanding the minds of those who are in charge of monetary policy as much as anything else. Both this year and next, this may be harder to do.
What markets want is the continuation of current monetary policy and a slow and steady return to normality. But there is a growing fear they may not get it.
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