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The era of monetary stimulus seems to be coming to an end ten years after the crisis, as the balance sheet total of the five largest central banks is currently growing at a much slower pace than in recent years. The Federal Reserve has already started reducing its balance sheet, while the ECB and the Bank of Japan plan to taper their stimulus programs.
Of course, we have to be cautious, but if the central banks stick to the planned course, monetary stimulus will almost end in one or two years. This means that a major buyer of government bonds will disappear and that governments and companies will once again be fully dependent on the market to finance their deficits. As a result, interest rates could rise further in the future.
— M/I_Investments (@MI_Investments) July 8, 2018
Economists disagree on whether central banks should have stopped stimulative policy much earlier. Due to the low velocity of money, official inflation is still low, but at the same time we are seeing new bubbles arise in real estate, for example, due to extremely low interest rates.
Central banks have also implemented virtually no interest rate hikes in recent years, which means that they cannot absorb a possible new crisis with a normal interest rate cut. In that case, central banks will have to switch to negative interest rates, which brings with it all kinds of new challenges. With negative interest rates, it is no longer attractive for savers to hold savings in a bank and they are more likely to seek refuge in alternatives such as investments, cash and precious metals.
Tapering monetary stimulus is a good step towards the normalisation of monetary policy, but it is questionable whether central banks have done enough. Compared to the previous crisis, they now have fewer conventional tools at their disposal to boost the economy, which means that in a new crisis they will be more likely to switch to more extreme measures to boost the economy.
This contribution was made from Geotrendlines
