Macroscope | Harsh reality is about to pop central banks’ bubble over painless tapering

Financial markets really seem to believe that monetary easing can go on forever without consequences. The beautiful bubble in which reality seems to be forever suspended will strike the craggy side of the equity and debt mountains it has created and pop

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US Fed chair Jerome Powell speaks during the virtual Jackson Hole economic symposium on August 27. Powell said the central bank could begin reducing its monthly bond purchases this year, though it won’t be in a hurry to begin raising interest rates thereafter. Photo: Bloomberg

Published: 4:00am, 6 Sep 2021

One witty commentator asked recently how you “un-bubble” a bubble such as the one we are seeing now in asset prices, stocks and real estate especially. The answer is that you do not. Either you pop it or it bursts spontaneously, although some bubbles float on for a while until they hit sharp reality.

That reality is looming close now after US Federal Reserve chairman Jerome Powell signalled to the virtual Jackson Hole central bankers retreat that the Fed could soon start reining in its massive monetary stimulus programme. Yet, the belief persists that Powell can do the impossible and un-bubble the bubble.

The Fed is expected to begin tapering its monthly bond purchases by the end of this year while the European Central Bank, faced with rising inflation, is expected to be considering tapering. Some argue this does not mean they will start raising interest rates then, but this is a philosophy of false consolation.

Are demands for government spending in the United States and elsewhere – where central banks will fall in line behind the Fed – supposed to magically decline despite the Covid-19 pandemic and the need for spending to fight climate change, not to mention the need to finance US President Joe Biden’s infrastructure package?

A Union Pacific Railroad freight train runs alongside US Highway 99 past farmland though Tulare county in the Central Valley, near Pixley, California, on August 26. The US Senate has passed a bipartisan infrastructure development bill that would see a US$1.2 trillion investment in roads, bridges, water pipes and high-speed internet across the United States. Photo: AFP

Who will fund these increasing demands for funds? Why, the bond markets of course. But who will be the buyers in bond markets if the Fed and others are curbing their own voracious appetites? Private financial institutions will buy, but unlike the Fed they do not have a mandate to keep down interest rates.

.css-1m2rp1p{color:#34b8b5;}Macroscope | Harsh reality is about to pop central banks’ bubble over painless tapering

Macroscope | Harsh reality is about to pop central banks’ bubble over painless tapering