In this regard, Eva Sanway, Fund Manager at M&G Investments, confirms, “The withdrawal of monetary and financial support is inevitable. The most important question is timing.
Here are the main aspects related to the financial policies of the US Federal Reserve and other central banks that will meet during the week:
What are the existing procedures?
The Federal Reserve, the European Central Bank, and their counterparts in Japan and Britain, among others, cut interest rates and launched massive asset-buying programs to prevent an economic catastrophe.
The programs aim to keep the economy running and reduce lending costs for individuals, businesses and governments alike.
The Federal Reserve, which begins a two-day policy meeting from Tuesday, cut interest rates to zero with the start of the pandemic crisis in March 2020.
In an effort to provide liquidity to the world’s largest economy, it will buy at least $80 billion in Treasury debt a month and at least $40 billion in mortgage-backed securities.
For its part, the European Central Bank created an emergency program to confront the epidemic, worth 1.85 trillion euros, which allows the bank to buy assets in financial markets such as bonds, to raise their prices and reduce interest.
The revised European Central Bank kept core refinancing operations at zero.
What is the reason for not rushing to lift the procedures?
Global inflation has risen, boosting market expectations that central banks may tighten money supplies to lower prices and prevent excessive pressure on economies.
Central banks in Brazil, Russia, Mexico, South Korea, the Czech Republic and Iceland raised interest rates this year.
But the Federal Reserve, the European Central Bank and the Bank of England, which also meet next week, have so far refrained from changing rates.
Federal Reserve, European Central Bank and Bank of England officials insisted that inflation was temporary and the result of a recovery in prices after falling at the height of last year’s epidemic.
Policy makers seek to avoid damaging the economic recovery in the event of a rush to withdraw a large part of the support.
what are they saying?
Every economic indicator is reflected in the markets from inflation, through unemployment, to consumer spending amid speculation about whether central banks will adjust their policies before or after the expected date.
Meanwhile, bank officials are choosing their words carefully. In August, Federal Reserve Chairman Jerome Powell said the central bank might “begin to lower the pace of asset purchases this year,” but he was silent about the timing.
The European Central Bank went further this month, deciding to ease the pace of monthly bond purchases, but without changing the size of the plan or its expiry date in March 2022.
Andrew Kenningham, chief European economist at Capital Economics, said the move was “far from being a complete setback”.
European Central Bank President Christine Lagarde left no doubt; She clearly stated that “the lady will not back down,” referring to herself.
Markets are expecting clearer indicators from the European Central Bank in December.
Have central banks succeeded?
The global economy is recovering at a time when people, as well as businesses and governments, are taking advantage of extremely low interest rates.
Meanwhile, governments have pumped $16 trillion into fiscal stimulus programs around the world, according to International Monetary Fund figures.
“We learned a lot from previous crises and the management of the Covid-19 crisis was almost perfect from an economic point of view,” said Vincent Yuvins of JPMorgan Asset Management.
He added, “The recovery is severe and significant, and we have not seen widespread unemployment or a wave of bankruptcies.” Rating agency S&P Global expects the default rate to decline in Europe in the near term, “especially if the policy of decline proceeds in an orderly manner, as expected.”
What are the negative repercussions?
Opponents of loose monetary policy largely point out that it deepens inequality by inflating the prices of financial assets and raising property prices.
The European Central Bank defends its steps by referring to studies conducted by researchers related to it, which considered that its policies contributed to reducing unemployment and gave impetus to families whose living conditions are somewhat modest. It was able to buy real estate thanks to the low interest rates.
The Organization for Economic Cooperation and Development, in a report in September, expressed concern about the potential negative repercussions that an extension of loose monetary policy could have on financial and real estate assets.
“Central banks’ interventions will only make sense if they avoid a recession,” said Nicolas Veron, an economist at the Petersen Institute and Bruegel Research Center.
“If it is no longer necessary to avoid a recession, its negative repercussions will be more than the positive,” he added. (AFP)
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