In the early days of the coronavirus pandemic, in order to save the economy and financial markets, many central banks took a measure - a large currency release. Now, as economies reopen, the impact of a massive currency boom has become a major risk for global investors.
This is not "unfounded". According to foreign media reports, a survey of 620 market professionals released by Deutsche Bank this week showed that 39% of respondents listed "central bank policy mistakes" as one of the three major risks affecting market stability, up from 21% last month.
Similar concerns are reflected in a survey of global fund managers released by Bank of America last week, where "taper tantrum" has become the second-biggest risk after inflation. The "shrinkage panic" refers to the central bank's easing of bond purchases, which leads to higher yields and triggers market panic.
↑ Infographic. In March, Fed Chairman Jerome Powell said the Fed needed to see real inflation continue above its 2% target before it could begin to tighten policy. Picture according to the Oriental IC
On the 25th, Mohammed El-Erlian, dean of Queen's College at the University of Cambridge and allianz insurance adviser, said in an op-ed published by the Financial Times that after a long period of stagnation, central banks are "awakening" and realizing the risk of a "financial accident with serious consequences". He noted that with expectations of a "shrinking panic" in the market, central banks now face a thorny turning point in how to close the floodgates to avoid damage from policy mistakes.
Central banks face a thorny turning point: how to close the gates becomes a problem
According to a new report by the Federal Reserve Bank of New York, the continuous release of water increased the Fed's balance sheet to $7.4 trillion last year, a record high. The bank expects that number could rise to $9 trillion by 2023, almost equal to the annual GDP of Japan and Germany combined. This means that policymakers cannot make any mistakes in dealing with the currency release gate, because today's investors are completely tied to the loose money provided by central banks such as the Federal Reserve.
Cnn Business's latest "Back to Normal" index on May 25 showed that the US economic recovery is 90% complete. But investors are increasingly worried that seeing such "promising" data and rising inflation, the Fed will make "destructive and wrong decisions," such as withdrawing unprecedented support measures prematurely or ignoring the growing "bubble" problem until it is completely "detonated."
The Bank of England has recently stated that the pace of continued asset purchases under the quantitative easing program may now slow down, setting a benchmark for future interest rate hikes. The European Central Bank (ECB) also warned last week that while "the economy remains dependent on policy support to prevent mass unemployment, corporate bankruptcies and economic contraction," financial markets "have shown significant booms."
El-Elian analysis said the ECB's warning "portended" what many considered to be an incredible sign that the ECB could taper back on quantitative easing before the Fed.
↑ New headquarters of the European Central Bank. Image according to Visual China
And the Fed, while acknowledging that keeping interest rates low for a long time and continuing to provide crisis-level stimulus measures poses increasing risks to markets and the economy, for now, Fed officials have almost universally adopted a common set of "rhetoric" — repeatedly reiterating that "there is no policy to consider reducing the size of debt purchases in the near future" to allay inflation concerns. However, the minutes of the Fed's policy meeting, released last week, show that some officials want to discuss this possibility "at future meetings."
"The Fed, which has been waiting too long, faces a tricky policy shift, especially now subject to a new monetary framework that is not suited to the structural changes in the economy associated with the pandemic." El-Elian noted. As a result, today's policy shift involves the dual risks of market volatility and the Fed's loss of credibility.
An asset bubble is brewing: deeper and broader than it was in 2008
Kerry Killinger, the former chief executive of Washington Mutual Bank, said he was concerned that another bubble was brewing.
During the 2008 subprime mortgage crisis, the Washington Mutual Bank collapsed due to the heavy burden of the subprime mortgage crisis, becoming the largest bank bankruptcy case in U.S. history. In an interview, Killinger talked about the similarities and differences between the market today and 13 years ago.
The good news, in his view, is that the 2008 global financial crisis triggered a wave of new federal regulations to ensure that a subprime mortgage crisis like those of 2008 does not happen again. "In the wake of the financial crisis, laws like the Dodd-Frank Act and the Volcker Rules were introduced, which improved the safety of large banks. So the status quo is much better for 'banks like JPMorgan Chase and other 'big enough to fail'. The industry is in good health, the benefits are good, and the regulation is strict. I'm not too worried. He said.
Killinger's fear is that bubbles in other areas of the economy threaten the stability of the market. "Today's bubbles are broader and deeper, and are not limited to real estate. The Fed's low interest rates and massive asset purchases have done a good job of getting the economy out of the downturn, but if you continue to extend these policies, there could be unintended consequences. He said.
↑On May 19, the three major U.S. stock indexes closed lower. On the same day, the Fed released the minutes of its April monetary policy meeting, and Fed officials hinted that it would discuss the reduction in the future, and the strong recovery in economic activity would trigger discussions of tightening monetary policy. U.S. stocks extended their declines after the minutes of the meeting were announced. Picture according to the Oriental IC
He noted that house prices have soared again in the context of the Fed's massive water release, but what makes him even more nervous is that zero interest rates and the Fed's massive bond purchases have triggered a broader frenzy for other assets, including cryptocurrencies, irreplaceable tokens (NFTS), meme stocks, SPAC (special purpose acquisition companies) listings and exotic ETFs (exchange-traded open-end index funds).
Killinger argues that the economic situation continues to improve, and it is time for the Fed to tighten stimulus and allow interest rates to rise.
El-Elian also believes that, as far as investors are concerned, the Fed should be encouraged to act, rather than just focusing on continuing to enjoy the fun of the liquidity wave. However, quitting addiction is easier said than done. But he said the lessons learned by the banking sector during the 2008 financial crisis showed that rather than suffering a lasting, greater damage to asset values, the functioning of markets, and economic and social well-being caused by larger policy mistakes, it was better to take on the risk of some short-term discomfort.
The FoMC, which sets the Fed's key policy rates, said at a recent policy meeting that "if the economy continues to move rapidly toward the committee's goals, it may be appropriate at some point to start discussing plans to adjust the pace of asset purchases." ”
But Killinger noted that before introducing policy, the Fed must do a better job of stress-testing big banks to ensure they can withstand greater volatility. He said the Fed had made the mistake of underestimating subprime mortgages during the last financial crisis, and then-Fed Chairman Bernanke commented in May 2007 that "the impact of problems in the subprime sector on the broader housing market is likely to be limited." ”
"Asset bubbles are getting bigger and bigger, and the Fed needs to test further how businesses will behave if the prices of these assets fall further." If there is a big correction, the impact can be enormous. ”
Red Star News reporter Xu Huan
Edited by Zhang Xun
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