Pandemic era monetary policy: Unusual into normal

4 min read

Forced to resort to non-traditional measures during the 2008 financial crisis and the Covid-19 pandemic, the US Federal Reserve (Fed), the European Central Bank (ECB), and many banks. Other central banks have become more drastic and creative than ever in protecting the economy from recession and the risk of deflation.

That is the common point that has been shown in the epidemic monetary policy that Bloomberg looks back in the recent article.

In particular, in recent months, the market has seen not only a return to policies that were first widely used following the collapse of investment bank Lehman Brothers, such as quantitative easing (QE), but also the adoption of more special policies.

The following chart of Bloomberg shows that most central banks are moving deeper and deeper into the “realm” of non-traditional policies. The Fed is buying various types of bonds, the ECB is innovating with negative yields, and Australia has followed Japanese-style efforts to control bond yields.

Y: Yes apply; N: Not applicable – Source: Bloomberg

While the recovery of the global economy is fragile and Covid-19 is sure to leave scars on both employers and workers, it is likely that monetary policy globally will will remain super loose for the next few years, even if that means the central banks forcefully uplift the market or trigger an escalation in prices.

This outlook has been highlighted through the Fed’s recent decision to allow inflation to exceed the 2% target in the future if necessary to compensate for inflation below target.

This week, the Fed, Bank of Japan (BoJ) and Bank of England (BoE) all have regular monetary policy meetings, and investors are wary of the possibility of any credit. What more creative measures can the policy-making body take?

“The Corona virus crisis has many times more devastation than the 2008 financial crisis,” said Steve Barrow, Head of Forex Strategy at Standard Bank. “There are all kinds of reasons to believe that it will take a long time, and perhaps much longer than the post-financial crisis, for the time to tighten monetary policy.”

Debate is “hot” at the moment is whether the need to revive economies will eventually force central banks to act more, and perhaps “co-operate” with government policy. Monetary policy makers now have closer coordination than ever with fiscal policymakers, in contrast to the traditional splitting of these two responsibilities.

Potential moves include direct financing to offset government deficits – a pivotal point in Modern Monetary Theory (MMT), which advocates for the rejection of the idea that there is something scary in debt monetization.

At the present time, policymakers are wary of such measures, but they are no longer afraid to push the measures they are applying to their peak.

Bank of America Global Research economists emphasized that, by the end of July this year, central banks had cut interest rates 164 times in just 147 days and pledged to pump $ 8.5 trillion into the global economy.

According to data from JPMorgan Chase bank, the average global interest rate is currently only 1%, and the average interest rate in developed countries in general has dropped below 1% for the first time.

The Fed, for example, responded to the pandemic with policies similar to 2008, but much faster and much further away. The Fed lowered the reference rate to almost zero and resumed buying in government bonds, while expanding its emergency lending powers to support municipalities, SMEs, and enterrpises.

The Fed’s balance sheet size is now at $ 7 trillion, compared with $ 4 trillion in January and an old peak of $ 4.5 trillion in 2015.

Increasing the size of the balance sheet of the Central Bank of Japan (BoJ), the US Federal Reserve (FED) and the European Central Bank (ECB) from 2000 to present. Unit: trillion USD – Source: Bloomberg.

So far, the Fed is still against the idea of lowering interest rates below zero – something the ECB and BoJ did many years ago – out of fear of causing turmoil in the banking system and upsetting MPs.

ECB really strengthened its policy in March this year by applying super-low interest rates, even lower than the reference rate, for banks that use money to finance real economy.

The central banks of Australia, New Zealand, and India are learning to control the Japanese yield curve with policies that intentionally influence certain maturity bond yields.

As for the types of assets central banks are willing to buy, there has been a huge shift far beyond America’s borders. Australia, New Zealand, and Canada all bought government bonds this year for the first time, and Canada is even buying corporate bonds. The central banks of Korea and Sweden have started buying corporate bonds and commercial paper.

In addition, more central banks are also pursuing policy-oriented measures, in which they commit to keep the policy loosened for a certain period of time to reinforce the confidence of investors and consumers and business.

“When the anomaly becomes the new normal, the central banks also face new challenges,” said chief economist Tom Orlik of Bloomberg Economics.

“Once the stimulus measures at the very strong level have been effective, it becomes even more difficult to withdraw them. The first signs of a rise in inflation will be a test. Mission concerns have pushed central banks into the realm where the fiscal policy coordination raises questions about the independence of the central bank, ”acknowledged expert Tom Orlik.

Source: – Translated by