Macroscope | Why the US Fed and PBOC both risk making policy mistakes
- Markets’ underpricing of the Fed’s resolve to tackle inflation could be devastating if and when the central bank is forced to raise rates more aggressively
- Likewise, amid signs of financial contagion in China’s property market, the PBOC must decide on the timing and extent of more forceful action
Over the past few months, one worry has been at the forefront of many investors’ minds: the threat of a major policy mistake by one of the world’s leading central banks, in particular the US Federal Reserve.
In Bank of America’s latest fund manager survey, published on Tuesday, an excessive tightening in monetary policy was cited by respondents as the biggest risk facing financial markets. The surge in inflation and asset bubbles were also a concern.
Given that many of the issues which have topped the list of respondents’ concerns over the past several years – the trade war and the 2020 US presidential election, for example – have not stopped global stock markets from hitting new highs, there is reason to be sceptical about surveys of investor sentiment.
Yet, there is a difference between a risk that could lead to a disorderly sell-off at some point in the future, and one that has already caused significant damage, or is underpriced and likely to materialise relatively soon.
When it comes to the world’s two largest economies, the two threats that stand out are the financial contagion ripping through China’s all-important property sector and the reluctance of investors to position themselves for a more hawkish-than-expected shift in US monetary policy.
While the liquidity crisis in China’s real estate industry has yet to pose a systemic threat to global markets, the spillover effects within China have become much more severe, perpetuating the loss of confidence in a sector that contracted 2.9 per cent in the final quarter of last year, the first consecutive quarterly decline since 2008.