And when the Fed partly reversed its stance in early 2019, suggesting it wouldn’t increase rates, recession fears receded and stocks soared to post one of their best years ever in terms of returns.
But the Fed kept shrinking its balance sheet, and by September the repo market ran into trouble. The central bank was forced to reverse here, too, and has boosted its assets by more than $400 billion, a move that coincided with the strong fourth-quarter rally in riskier assets such as equities. The takeaway here is that it will be extremely hard for central banks to reverse “money printing.”
With inflation doormat, though, there is no need for central banks to start tightening monetary policies anytime soon and “break” the economy. But should policy makers get their wish and some inflation returns, then it would be time to worry.
Central bankers try to operate under the Hippocratic Oath: “First, do no harm.” We will not know if they have caused any harm until they reverse their unprecedented balance sheet expansion without incident. The Fed’s recent experience is not encouraging.
This opinion piece was provided by Bloomberg News.