Focus Is Now Firmly on the Central Banks; PAUL MILBURN, Investment Analyst at Lowes Financial Management, Looks at the Potential Changes to Global Monetary Policy in the Months Ahead, Especially to Quantitative Easing

The Journal (Newcastle, England), October 21, 2017 | Go to article overview

Focus Is Now Firmly on the Central Banks; PAUL MILBURN, Investment Analyst at Lowes Financial Management, Looks at the Potential Changes to Global Monetary Policy in the Months Ahead, Especially to Quantitative Easing


AS WE head into the final quarter of the year, politics remains firmly on the agenda.

Here in the UK the negotiations around Brexit continue with party infighting about how the UK should approach this delicate situation. In Germany, Angela Merkel successfully held on to her role as Chancellor but the increasing popularity of right-wing politics stood out.

Meanwhile, Donald Trump continues to air his views in the US but we are as yet to see any of the real promises made during his presidential campaign come to fruition. Finally, North Korea continues to test the patience of its neighbours with its continued missile testing. While all of the above could have longer-lasting consequences, for now markets appear to be considering these to be short-term noise.

Of more interest in the coming months will be the action of central banks, responsible for setting monetary policy around the world. In the US the Federal Reserve has now increased interest rates three times, from their record low of 0.5% to their current level of 1.25%. However last month the Fed announced that it will also start to reduce the size of its balance sheet from this October.

Prior to 2008 few of us had heard of Quantitative Easing (QE), and when it was first implemented few understood the impact that it would have. While the advantages and disadvantages which QE brought will be debated long into the future, one point which cannot be argued against is that, along with record low interest rates, QE brought an extended period of extremely accommodative monetary policy.

Now, with the US economy on a firmer footing, growing at an annualised rate of just over 3%, unemployment at its lowest rate since 2001 at 4.2% and inflation just under 2%, the Federal Reserve is ready to reduce the size of its balance sheet. This is to be achieved by reducing the number of bonds they hold.

To provide a stable level of QE the central bank had been reinvesting the proceeds from the maturity of bonds they own back into new bonds. …

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