Central banks tiptoe to tapering

Paris (AFP) – To type or not to type?

That’s the question central bankers face as they debate when they should reverse the massive economic support measures they deployed last year to prevent a pandemic-induced Great Depression.

“The withdrawal of monetary and fiscal support is inevitable. The key issue is timing, ”said fund manager Eva Sun-Wai at M&G Investments.

As the United States Federal Reserve and other central banks hold meetings this week, here are key questions regarding their monetary policies:

The Fed, the European Central Bank (ECB) and their counterparts in Japan, Britain and elsewhere cut interest rates and launched massive asset purchase programs last year to avert economic catastrophe .

The goal of the programs is to keep the economy booming by making borrowing money less costly for individuals, businesses and governments.

The Fed, which begins a two-day policy meeting tomorrow, cut rates to zero at the start of the pandemic in March 2020.

The Federal Reserve Building in Washington DC. PHOTO: AFP

To provide liquidity to the world’s largest economy, it buys at least $ 80 billion a month in Treasury debt and at least $ 40 billion in agency mortgage-backed securities.

The ECB has a € 1.85 trillion Pandemic Emergency Purchase Program (PEPP), allowing the bank to purchase financial market assets such as bonds, making it raise their prices and lower interest. The ECB has kept the rate on its main refinancing operations at zero.

Inflation has skyrocketed around the world, raising market expectations that central banks will tighten money supply to lower prices and keep economies from overheating.

Central banks in Brazil, Russia, Mexico, South Korea, the Czech Republic and Iceland have raised interest rates this year.

But the Fed, the ECB and the Bank of England (BoE), which is also meeting this week, have so far stuck to their positions.

Officials at the Fed, ECB and BoE have insisted that inflation is only temporary and a consequence of the price recovery after declines at the height of the pandemic last year. Policymakers want to avoid hurting economic recovery by withdrawing too much support too quickly.

Markets have reacted to all economic indicators – from inflation to unemployment to consumer spending – in a guessing game as to whether they will force central banks to adjust their policies sooner or later than expected.

Bank officials, for their part, carefully weigh their words.

Fed chief Jerome Powell said in August that the central bank could “start slowing down the pace of asset purchases this year,” but he has remained low-key on the timing.

The ECB went further this month, deciding to slow the pace of its monthly bond purchases, but it did not change the size of the device or its March 2022 end date.

“It’s far from a ‘full tap’,” said Andrew Kenningham, chief economist for Europe at Capital Economics.

The head of the ECB, Christine Lagarde, was herself clear: “The lady does not shrink,” she said.

The markets are waiting for a clearer signal from the ECB in December.

The global economy is recovering as individuals, businesses and governments have taken advantage of ultra-low interest rates. Governments, meanwhile, have injected $ 16 trillion into fiscal stimulus programs around the world, according to IMF figures.

“We have learned a lot from previous crises and the management of the COVID-19 crisis has been almost perfect from an economic standpoint,” said Vincent Juvyns of JP Morgan Asset Management.

“The recovery is clear and massive and we have not experienced mass unemployment or a wave of bankruptcies,” he said.

Rating agency S&P Global said the default rate in Europe is expected to decline in the near term, “particularly if the policy pull-out goes in an orderly fashion, as expected.”

Critics said the ultra-accommodative monetary policies only worsened inequalities by inflating the prices of financial assets and raising real estate prices.

The ECB is defending its actions by citing studies by affiliate researchers saying its policies have helped curb unemployment, giving a boost to lower-income households who have also become homeowners thanks to lower rates.

An OECD report released in September expressed concerns about the potential negative side effects that extending easy monetary policies could have on the prices of financial and real estate assets.

“Central bank interventions only make sense if they avoid a recession,” said economist Nicolas Veron of the Peterson Institute and the Bruegel think tank.

“If they are no longer needed to avoid a recession, they have a much more negative effect than a positive one,” he said.

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