Tags: central bank | ecb | federal reserve | monetary policy

Central Banks Seek to Maintain Economy at Status Quo

Image: Central Banks Seek to Maintain Economy at Status Quo
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Monday, 18 December 2017 10:40 AM Current | Bio | Archive

Over the coming days we will not look at the daily events as usual, but instead considering some longer-term questions.

The key change of 2017 was a shift in central bank policy. Most of the world’s major central banks have moved to either tighten policy in some form, or signal a degree of tightening in 2018.

The Japanese are the main exception, although Sweden’s Riksbank with an unchanged policy position for now.

However, the tightening of most central banks today, is not quite the same as the tightening of central banks in the past.

For almost four (4) decades, central banks have tended to focus policy on interest rates, which is “monetary policy.”

However, since the crisis, two (2) other pillars of policy have played a more important role. Printing money, which is “quantitative policy” has become a policy objective in a way not seen since the monetaristic experiments of the early 1980s. In addition, though often overlooked, “regulatory policy” has also played a more important role.

Ultimately, central banks seek to influence the price of money and the ease with which money can be obtained.

Change in the interest rate, printing money and changing the regulation of the banking system as providers of credit are all important pillars in that process.

The first change therefore is that central banks are now using more policy leaders to achiever their objectives.

While monetary and quantitative policy were eased after the crisis, regulatory policy was generally tightened. The net effect was still an easing of policy, but regulations should not be overlooked.

Now, quantitative and monetary policy are being tightened globally, but regulation is either static or potentially easing, at least, that would appear to be the intention in the United States.

The second change is what central banks are trying to achieve with their policy tightening.

From the Volcker-shock of the early 1980s onwards, central banks’ policy objectives were pretty simple.

Paul Volcker was Fed Chair under Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987 and is widely credited with ending the high levels of inflation seen in the United States during the 1970s and early 1980s.

At that time, central banks sought to reduce inflation by lowering demand, by slowing growth and by reducing companies’ pricing power.

In the United States, the peak of each inflation cycle was lower than the previous peak as central banks aggressively sought to squeeze inflation out of the economy.

This is no longer the policy aim of central banks.

Central banks do not want lower inflation, they do not want slowing growth and they do not want reduced company pricing power. Central banks want to maintain the status quo.

The tightening we are seeing is aimed at preserving current inflation, preserving current growth and preserving current pricing power, not reducing.

This has implications for investors and financial markets.

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HansParisis
Over the coming days we will not look at the daily events as usual, but instead considering some longer-term questions.The key change of 2017 was a shift in central bank policy. Most of the world's major central banks have moved to either tighten policy in some form, or...
central bank, ecb, federal reserve, monetary policy
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2017-40-18
Monday, 18 December 2017 10:40 AM
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