Central Banks Cave, Usher In The Crack-Up Boom

This was going to be the year when the other big central banks joined the Fed in “normalizing” interest rates and reversing the past decade’s QE experiment. Instead, the other central banks blinked and went back to aggressive ease, and the Fed is following them. This is a very big deal.

Let’s consider some before-and-after stories:

In September 2018, the European Central Bank began tightening:

European Central Bank to take next step in tapering stimulus

(AP) – The European Central Bank is expected to ratchet back its stimulus efforts again on Thursday as it gingerly phases out extraordinary support for the economy left over from the Great Recession and the euro currency union’s debt crisis.

The bank’s 25-member governing council is expected to cut its monthly bond-purchase stimulus to 15 billion euros ($17.4 billion) a month from 30 billion a month, on the way to ending the purchases at the end of the year.

Reinhard Cluse, chief European economist for UBS, said that after the June meeting “the ECB is now essentially on autopilot.” Cluse said that the ECB can phase out the bond purchases and then decide the exact timing of next year’s first rate increase in the summer or fall.

But before any actual tightening took place, the EU economy slowed and turmoil flared in Italy and France. This week:

European Central Bank announces major policy reversal

(WSWS) – The European Central Bank has reversed its policy of slight monetary tightening and announced a new stimulus package in the face of data which show a sharp downturn in growth in the euro zone. The unanimous decision was taken at the meeting of the ECB’s governing council held in Frankfurt yesterday.

The decision came just three months after the central bank announced it was phasing out its asset purchasing program. The bank indicated it would keep interest rates at historic lows at least until next year and potentially indefinitely and set out a new program to offer cheap loans to euro zone banks.

It also indicated it would continue to reinvest the proceeds of bonds which mature under its €2.6 trillion quantitative easing program for an “extended period of time” with reinvestments amounting to about €20 billion a month.

The decision by the ECB came as a result of what president Mario Draghi characterised as a “substantial” downward revision of growth estimates for the region. He said the new outlook for annual growth in gross domestic product was 1.1 percent for 2019, 1.6 percent for 2020 and 1.5 percent in 2021.

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