EDITORIAL: Don’t bank on a consistently stronger rand
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For the rest of us, according to Jeffrey Halley, a senior market analyst at Oanda, the “flood of money means that the disconnect between equity markets and the real world is set to continue for some time to come”.
He was responding to dovish comments from some of the world’s leading central banks such the US Federal Reserve, the Bank of Japan, and policymakers in Australia and New Zealand. Jerome Powell, chair of the Fed, started it last week with a policy shift that means rates will stay lower even if the economy improves.
Instead of pursuing a straight target of getting the inflation rate to 2%, it will now aim for an average, and will take into account previous periods of its undershooting so that hitting the target doesn’t mean an automatic rates increase.
Even after a decade of near zero interest rates and quantitative easing, which saw the Fed add $3-trillion to its balance sheet in the latest round of monetary stimulus in response to the pandemic, inflation is running at half the target, so it’s going to be a long time before US rates rise.
The Fed also changed its approach to the jobs mandate, meaning it won’t act immediately when unemployment falls and will instead focus on achieving maximum employment.
There are many criticisms to be made about the policy, including that it implies policymakers doing more of what had been ineffective for more than a decade, in the hope that it will suddenly work. And it also runs the risk of overstating the Fed’s ability to rein in inflation once it exceeds hits 2% for “some time”.
Some argue that the assumption it can simply turn the tap off at its time of choosing then see prices behave accordingly may be naive.
With the Fed buying everything from AAA rated US bonds to speculative paper issued by companies that may have hit the wall by now, it’s anyone’s guess what kind of bubbles and distortions are being built into the system.
That’s why the biggest economic depression since the 1920s is going hand in hand with record-high equity prices, and investors are rightly nervous about how it will end. For a nation that prides itself as being at the centre of a free-market system to have a monetary policy that preserves “zombie” companies that would otherwise fail aid is something few would have predicted.
But ...
He was responding to dovish comments from some of the world’s leading central banks such the US Federal Reserve, the Bank of Japan, and policymakers in Australia and New Zealand. Jerome Powell, chair of the Fed, started it last week with a policy shift that means rates will stay lower even if the economy improves.
Instead of pursuing a straight target of getting the inflation rate to 2%, it will now aim for an average, and will take into account previous periods of its undershooting so that hitting the target doesn’t mean an automatic rates increase.
Even after a decade of near zero interest rates and quantitative easing, which saw the Fed add $3-trillion to its balance sheet in the latest round of monetary stimulus in response to the pandemic, inflation is running at half the target, so it’s going to be a long time before US rates rise.
The Fed also changed its approach to the jobs mandate, meaning it won’t act immediately when unemployment falls and will instead focus on achieving maximum employment.
There are many criticisms to be made about the policy, including that it implies policymakers doing more of what had been ineffective for more than a decade, in the hope that it will suddenly work. And it also runs the risk of overstating the Fed’s ability to rein in inflation once it exceeds hits 2% for “some time”.
Some argue that the assumption it can simply turn the tap off at its time of choosing then see prices behave accordingly may be naive.
With the Fed buying everything from AAA rated US bonds to speculative paper issued by companies that may have hit the wall by now, it’s anyone’s guess what kind of bubbles and distortions are being built into the system.
That’s why the biggest economic depression since the 1920s is going hand in hand with record-high equity prices, and investors are rightly nervous about how it will end. For a nation that prides itself as being at the centre of a free-market system to have a monetary policy that preserves “zombie” companies that would otherwise fail aid is something few would have predicted.
But ...