Is this the end of super-cheap money? Judging by various headlines, it would be easy to believe that central banks are on the verge of withdrawing their loose monetary policy altogether. But is this really the case?
After more than 18 months of central bank support, these global policy makers have to plot a way out of this extreme monetary accommodative period. It is evident they have started to do so, especially following the recent meetings of the Federal Market Open Committee (FOMC) and the Bank of England (BoE).
However, it is important to emphasise that the authorities have not really argued for an end to the cheap money phase.
Why this is not the end?
Firstly: The US Federal Reserve (Fed) has mapped out a path towards slowing down the pace at which it adds liquidity, by lowering its asset purchases. This is due to end sometime towards the middle of next year. By this time, their balance sheet would have more than doubled to around $9 trillion (from the current level of $8.5 trillion) since the most recent pandemic-induced intervention.
The BoE have also recommitted to increasing the size of their balance sheet. It retained its target of £895 billion.
The European Central Bank’s (ECB) balance sheet is set to rise further, to over €5 trillion, as it continues with its asset purchases.
Secondly: The marginal shift in the FOMC’s dot plot, which it uses to signal its outlook for the path of interest rates, does not imply an immediate rate hike. Despite the headlines, it is important to note that the market’s implied rate path is not indicating any interest rate increase until 2023.
First signs of normality
While we may not agree with the panic from some of the headlines, there has been definite shift in tone. Central banks can see signs of some normality re-emerging in coming quarters. But, this normality will mean even larger balance sheets and interest rates that are still lower than they were in March 2020. Trying to get to a point when rates can revert to where they were at the start of the pandemic seems a very long way off.
Ultimately, it will be growth and inflation that will dictate the speed of normalisation. In our primary scenario this is unlikely in 2022 or even in 2023.
This is not the end of cheap money. It is more likely that the emergency programmes have to be ended as the economic recovery continues. We will likely still have cheap money, just as we’ve had since 2008/’09.
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q4 2021 here.
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