Are Central Banks across the Globe Preparing to Go Light?
Global central banks signal exit from stimulus
Central banks around the globe are preparing markets for a gradual withdrawal from accommodative monetary policies. The US Federal Reserve was the first to initiate this process by scaling down its QE (quantitative easing) program and starting to increase interest rates in the US.
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The Fed has increased the interest rate on federal funds four times in the past seven months, with the first rate hike in December 2015 and the most recent in June 2017.
The federal funds target rate now stands at 1.125%. The Fed is expected to increase the rate (TIP) one more time this year and three times in 2018, taking the effective rate to 2.125 over the next 18 months. Other major central banks that are signaling monetary tightening include the ECB (European Central Bank) and the BOE (Bank of England).
Why are central banks tightening the screws?
The core objective of any central bank is to maintain stable prices and a desired level of employment in the economy. Since the onset of the financial crisis in 2008, central bankers have taken extraordinary measures to help stabilize their economies, and now, amid signs of recovery, central banks are trying to return to what is thought of as normal monetary policy by removing existing stimulus or QE programs.
These calculated and gradual exit steps are necessary for maintaining stability in economies and should prevent economies from overheating if inflation rises too quickly. Such steps should also enable central banks to use regular monetary policy tools more effectively when required in the future.
In this series, we’ll discuss the current status of monetary policy stimulus in the US, EU (VGK), and the UK (EWU) economies. We’ll also examine how these tightening measures are likely to impact equity (SPY), fixed income (BND), and currency markets (UUP).
Continue to the next part for a closer look at the Fed’s strategy and recent signals.