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Central Banks Are Just Getting Warmed Up

Central Banks Are Just Getting Warmed Up

According to all central banks, one of the main problems they are called to solve is that countries cannot reach their inflation target of (close to but below) 2 percent. Even their religious trust in the long-discredited Phillips curve cannot explain why price inflation is low in many countries despite historically low unemployment rates. Nonetheless, central banks still enjoy immense credibility. It’s common to hear such sentences as “never bet against the Fed,” the “ECB has big bazooka primed”… and all market participants monitor each public meeting to understand what the next policy could be and how they should be positioned when it arrives.1

To reach the inflation targets and “stimulate the economy,” central banks regularly meet to devise ever-new stimulus programs, and do not despair when, inevitably, the one-off unconventional interventions quickly become the new normal. For example, the world-famous Quantitative Easing (QE) was supposed to be a one-time emergency response to the 2008 crisis, except it has now become one of the many tools of regular monetary policy, and a key component in market demand for financial assets. An undesired but perfectly predictable side effect of QE is that it allows governments to increase their spending without care for the deficit, and still pay negative interest rates in real terms, so no discipline is imposed, except for some empty promise to reduce the deficit some time in the future, if the opportunity comes. Several Western countries have embarked in QE, some in many consecutive rounds, but there is no mention of a reverse-course, an eventual, opposite Quantitative Tightening (QT). Only the United States have tried QT, and the Fed has even announced that they were on a stable and data-driven process back to normalization, to try to maintain their reputation of scientific management of the monetary aggregates.

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