- Eight years on from the collapse of Lehman Brothers, & macro comparisons with 2008 can thankfully be diluted. Yet, policy rates in 2017 will stay close to the floor, while, separately, political risk in the developed economies - largely absent in 2008 - is building
- 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 (1%) than in past recoveries.
- We update our ‘Policy Looseness Analysis’ to gauge how monetary & fiscal mixes will shift in 2017. By taking explicit account of QE, true US & UK policy rates may be as low as -4½% & -2½%.
- In the long term, the Fed & BoE looking to peak out at lower than ‘normal’ rates can pull on the other monetary lever: ‘QT’. This may go some way to removing the unintended consequences of QE.
- Meantime, without convincing recoveries, any contagion, unlike 2008-09, may be political rather than financial. Hopefully, governments in 2017 will help avert this by offering fiscal solutions, taking the policy ‘baton’ back from the central banks...
Adapting to the BoE's corporate-bond buying programme