Speaking at the same briefing, the head of the PBOC’s monetary policy department Sun Guofeng said current interest rate levels are appropriate and the central bank will use various policy tools to ensure reasonably ample liquidity. Speaking at the same briefing, the head of the PBOC’s monetary policy department Sun Guofeng said current interest rate levels are appropriate and the central bank will use various policy tools to ensure reasonably ample liquidity. The Bank announced a series of measures alongside the rate cut designed to alleviate stressed financial conditions. The FOMC will increase its holdings of Treasury securities and mortgage-backed securities by at least USD 500 billion and USD 200 billion, respectively, a move reminiscent of the quantitative easing measures taken during the financial crisis.
I don’t know for sure, but it seems possible that the Fed would have had to push the economy into a recession to stop stock prices from rising further. In 1996, then-Fed Chairman Alan Greenspan gave his famous “irrational exuberance” speech, where he said the stock market was overvalued. Essentially, Greenspan was warning that a bubble was forming and that investors needed to be careful because a correction was coming. The stock market did end up correcting in the early 2000s, after the P/E ratio reached 26. 9 by the end of 1999. Of course , it is impossible to know what would have happened if Greenspan had used monetary policy to act on his irrational exuberance call. But given how the stock market has climbed in the following 20 years, I would say that this was a “false positive”—identifying a bubble far too early, or seeing one where it didn’t exist.
The Bank also rolled out a number of other policies including ramping up its overnight and term repurchase agreement operations. Meanwhile, a coordinated effort between the Fed and five other leading central banks will manage swap lines to reduce dollar funding pressures. The Bank’s latest round of stimulus follows an USD 1. 2 trillion injection in short-term money markets on 12 March as liquidity conditions became increasingly tight in recent weeks. The one caveat is that quick and sharp rises in long-term yields, accompanied by the Fed tightening its monetary policy, can pressure valuations and trigger episodes of market volatility.
This is not a major risk this time around, in our view, as we expect the Fed to keep rates near zero for at least the next two years, and we expect global growth to accelerate at its fastest pace since 2010. Pressure in equity valuations from a sustained rise in yields is possible, but the 22% expected growth in S&P 500 earnings this year provides some cushion2. Rising inflation expectations – The latest inflation data released last week showed only a small increase in prices for December. Compared with last year, the consumer price index rose 1. 6%, well below the 2. 2% pre-pandemic 2019 average1.
Such an example was the late-2018 spike in 10-year yields to 3. 23% that caused an almost 20% pullback in the S&P 5001. The Fed hiked its policy rate four times during the course of the year at the same time as global growth was decelerating.
Also, macroeconomic performance and external vulnerabilities may matter. However, financial openness does not seem to be associated with differences in effects on capital flows over our sample period. Imagine if the Greenspan Fed had decided to use monetary policy beginning in 1996 to stop stock prices from climbing further.
However, expectations for future inflation have been rising for the first time in years. The 10-year breakeven rate, a market-based measure of inflation expectations, rose to the highest level since 2018 amidst rising commodity prices, a lower dollar, and broad policy support. A still-weak labor market will probably limit the upside in inflation, but as we watch the economy enter the months that a yr ago endured low prices at the height of the pandemic, we could see a temporary spike in inflation.