- The US Fed remains the test case for whether central banks can ever ‘normalise’ rates. We expect it to try, but fail - peaking out at a far lower policy rate (1¼-1½%) than in past US recoveries.
- We update our ‘Policy Looseness Analysis’ to gauge how the US & UK’s overall - monetary & fi scal - policy positions should shift into 2018. By taking explicit account of QE, true US & UK policy rates may be as low as -4¼% & -3% respectively.
- Running true rates this low would make the FOMC increasingly uncomfortable if at the same time the QE stock remains as bloated.
- Selling the assets back is admittedly one for later, & would have to be done gradually to minimise the disruption to bond markets. But, as a precursor, terminating the reinvestment programme would surely be the gentlest way of tightening - in effect by ‘doing nothing’.
- It would help keep peak rates low, & give comfort that central banks are not falling ‘behind the curve’. It may even go some way to reducing the downside of QE, evidenced by asset-price distortions, suppressed saving, & funding strains on many pension schemes...
Introduction to Hermes Global Emerging Markets