’The End of Accommodation’’
In a small town in Wyoming, population 9,000, central bankers from around the world will gather to dissect their recent monetary policy decisions and, hopefully, layout the path to normal interest rates.
Price volatilities and political dramas stemming from Washington will be at the forefront of the agenda.
The central bankers will likely acknowledge the time limit on easy money programmes, noting that there are only so many bonds available and that we are tantalisingly close to the end of this tedious scheme. In other words, the bank’s backed into a corner and hands are tied. The time has come to start raising rates.
This lengthy period of negative rates has fostered problems, such as an imbalance in financial markets and skewed measurements of risks. The fruits of these ultra-low interest rates will dampen what little growth we have, if left to fester.
Investors are looking for a gradual and collective step towards the end of quantitative easing. If central bankers deliver on a cohesive recognition of the winding down of quantitative easing – most importantly the ECB and the Fed – we should see a rise in bond yields and an injection of market volatility.
US equity investors may take-profit in this instance, keen to protect profits at record -high prices.
The Perils of Quantitative Easing
The easy money tactic has caused a credit bubble through easily accessible loans thanks to low interest rates. However, once central banks hike the cost of borrowing, disposable income will not only decrease significantly (remember, wages have remained stagnant) but many may be unable to make repayments.
Additionally, quantitative easing kept currency valuations down. Since ultra-low interest rates provide little yield, currency markets remained subdued.
Once a reliable source of economic indicators, bond market distortion has disabled market analysts from predicting future trends.
The United Kingdom’s risk is more pronounced as the nation navigate its way out of the single market. The UK’s real estate sector has proved to be, so far, robust against the backdrop of political uncertainty. Like its counterparts, an increase in borrowing due to low interest rates have led to a decrease in spending. House prices will not remain immune to the uncertainties of Brexit thus will eventually come down to meet liabilities – consumer confidence will feel the pinch, decreasing with disposable income.