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Angst grows over end of 'easy money' policies
Thu Mar 9, 9:59 PM ET
WASHINGTON (AFP) - Japan's shift away from its ultra-loose monetary policy is the latest in a series of central bank moves creating jitters in financial markets but which may mean a healthier global economy, analysts say.
Markets have recently been roiled by growing concerns about actions by central banks in the United States, Japan and Europe to curb some of the almost-free cash that has been fueling economic growth.
In the US, the yield on the benchmark 10-year bond has jumped nearly half a percentage point to 4.74 percent this week -- the highest in nearly two years -- after reaching a low of 4.33 percent in January.
Many analysts see the 10-year yield climbing above five percent if the Federal Reserve lifts its base rate to that level.
The European Central Bank has hinted after two quarter-point rate hikes that it may not be finished, and the Bank of Japan Thursday ended its policy of flooding the market with liquidity, suggesting a move up from its zero-rate policy.
"The BoJ did warn that the changes would occur over a period of several months and as a result rates are not likely to rise for some time, but the market will take the change in policy as a turning point for Japan," said Jon Gencher, analyst at BMO Nesbitt Burns.
Stephen Roach, chief economist at Morgan Stanley, said a jump in interest rates worldwide has serious implications.
"My guess is that this is not good news for what has been a liquidity-driven, increasingly asset-dependent global economy," he said.
Roach said the current environment has seen huge capital inflows to the United States, keeping interest rates low and fueling a boom in consumption of imports from around the world.
"A US consumption shock would be especially worrisome in that regard -- a development that would reverberate quickly into Mexico, China, Asia's China-centric supply chain, and even a China-linked Brazilian economy," Roach said.
Other analysts say central banks are taking a risk in lifting rates in anticipation of stronger growth and inflation.
"Central banks continue to be guided by macroeconomic models that relate to an economy that no longer exists," said CIBC World Markets economists Jeff Rubin and Avery Shenfeld in a report.
By being out of touch, the central banks "could deliver an economic deceleration through interest rate hikes that are simply not necessary," the economists said.
Robert Brusca of FAO Economics said it is unrealistic to expect inflation and interest rates to revert to historic norms. He argues that in the globalized economy, inflation is held in check by outsourcing to low-cost economies like China and India and by new technology.
"We're never going back to normal," he said.
Brusca said the Bank of Japan carefully avoided any commitment to lift rates at any time soon.
"It is clear in the BoJ directive that the Bank intends to move slowly," he said. "There is nothing in this report to suggest that any jarring change is in the works -- quite the opposite."
But those worried about a spike in rates are missing the point, says David DeRosa, adjunct professor of finance at the Yale School of Management.
"The reason why interest rates have been creeping up is that these economies are getting stronger," DeRosa said. "This doesn't mean there are any broad implications (for the rise). These are relatively incremental changes."
Drew Matus, senior economist at Lehman Brothers, said central banks around the world are finally coming out of the stimulative phase following the aftermath of the September 11, 2001 attacks to avert a global recession.
"They are all trying to slow the economy just enough to get a 'Goldilocks' scenario" that is neither too hot nor too cold, said Matus.
But Matus said this task is imprecise, and predicted the Fed will probably "overshoot" by tightening too far because "the cost of overshooting is less than the risk of undershooting."
If the Fed lets inflation get out of control, "they lose credibility" and will have a hard time reining in inflation. But he maintained that this move would probably slow US growth to around 2.8 percent by next year, below the ideal pace of 3.2 percent.
Nonetheless, Matus said financial markets may be rocked by the higher cost of borrowing.
"Everyone is aware the easy money is going away, that that leads people to reassess how they allocate their resources," he said. "It could lead to more volatility."
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