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Tightening by doing nothing...

Ahead of the curve

Home / Perspectives / Tightening by doing nothing…

Neil Williams, Group Chief Economist
03 May 2017
Macro Economics
  • 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...

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Neil Williams Group Chief Economist Neil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks - including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 30 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea.
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