Easy money era endures even as central banks unwind stimulus

Bloomberg

Don’t declare the end of easy money just yet. Major central banks took significant steps last week towards dismantling the emergency stimulus they’d used to lubricate financial markets and escape recession in the decade since the financial crisis. But most are clear that they’re not ready to get out of the business of supporting their economies.
After raising interest rates for the second time this year and dropping a longstanding assurance for loose policy, Chairman Jerome Powell and his colleagues described US Federal Reserve’s stance as accommodative. European Central Bank President Mario Draghi said a decision to halt bond purchases by December would still leave significant monetary stimulus beyond then, especially as euro-zone rates won’t go up before the summer of 2019.
Such commitments mean the loose-money era endures. Bank of America Corp estimates the combined balance sheet of the world’s biggest central banks is still $11.8 trillion higher than when Lehman Brothers Holdings Inc. collapsed in September 2008, and just short of a $12.3 trillion peak. JPMorgan Chase & Co. economists reckon a gauge of interest rates in the developed world is below 1 percent and won’t be above 1.5 percent a year from now. “We have seen the peak of easy money, but that doesn’t mean we are going straight to tight money,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd in Sydney.
Perhaps that’s just as well. While the world economy is enjoying its strongest upswing since 2011, International Monetary Fund Managing Director Christine Lagarde warned last week that the clouds are “getting darker by the day.” Even so, Germany’s central bank said on Monday it remained confident that growth in Europe’s largest economy was set for a rebound.
The prospect of a trade war, the constant threat of populism and deteriorating security are already denting confidence, and inflation remains below, or yet to convincingly breach, the targets of leading central banks. Even so, Germany’s central bank said on Monday it remained confident that growth in Europe’s largest economy was set for a rebound.
Moreover, investors have become so used to cheap credit that even a small pullback would carry risks. Recent shifts have already dealt a blow to highly-leveraged companies and eme- rging markets, partly because the Fed’s decisions pushed up the dollar. Fed policy makers bumped up their projection for total rate increases this year to four from three. They also pared back their guidance to markets by deleting language that rates were likely to remain below their long-run equilibrium level for “some time.”