- 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...
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