In New Zealand, the central bank has stopped buying government bonds. And in Norway, the central bank is raising interest rates. We can safely see these geographical opposites as the first signs of a change in the monetary landscape. What does this mean?
The era of ultra-loose monetary policy seems to have had its day. Especially now that the Fed announced last week that it was about to start tapering. In other words, phasing out the purchase of government bonds, among other things. To start tapering, the Fed imposed two conditions at an earlier stage.
These conditions were that there had to be significant progress in the areas of inflation and employment. More specifically, inflation must rise to the target rate of around 2% and employment must move towards full employment, which equates to around 3,5 to 4% unemployment.
Progress on both fronts
Jerome Powell, chairman of the Fed, indicated that inflation is showing more than significant progress. On employment, he said some committee members believe that requirement has also been met, but others think it is close to being met. “And I myself would say it's pretty much met,” Powell added. In other words: significant progress on both fronts is as good as a fact.
"If this progress continues as we expect, the committee believes that a reduction in bond purchases may soon be justified," the statement said afterwards. This buying will then stop completely in mid-2022, which means that after the next meeting (on November 2 and 3) the Fed will reduce the pace of purchases per month by about $10 to 15 billion.
Could something throw a spanner in the works, such as a bad jobs report this week? In theory yes, but in practice it must be a very lousy report.
Monetary traffic light on green
Powell said that a 'reasonable jobs report' will definitively clear the way for tapering. In my opinion, a 'reasonable jobs report' means that the number of new jobs must be higher than the growth of the labor force. In figures: if it turns out that more than, say, 150.000 new jobs were created in September, the monetary traffic light for tapering will definitely turn green for the Fed.
The fact that the Fed is going to taper certainly does not mean that interest rate increases are imminent. The bar for that, or the lift off as the Fed calls it, is much higher and according to Powell, we are "considerably far from the point where lift off is justified." But there is no doubt that the monetary policy will soon be changed. Just like the moment of the first interest rate increase in years, which is getting closer every month from now on. This change in exchange rate may ultimately push long-term interest rates up rather than further down. And if the European Central Bank (ECB) does not follow the Fed (quickly) or follows less closely, the dollar could easily become stronger.
Stand Greenspan upright
During the 1999 US election campaign, Republican Senator John McCain, when asked whether he would reappoint Alan Greenspan as Fed chairman, replied that not only would he reappoint him but "if, God forbid, he were to die, I would do the same." like in the movie Weekend at Bernie's, which is to stand him upright with sunglasses on and pretend he was still alive for as long as he could." I thought of that anecdote after the last meeting of the Fed's interest rate committee.
What does Senator McCain's statement about Greenspan have to do with all this? Powell's term as Fed chair ends in February next year. Typically, the incumbent president decides 4 to 6 months beforehand whether he will reappoint the chairman or nominate someone else. Powell would not say whether he has discussed his reappointment with the White House or even whether he wants to do so at all. If I were President Joe Biden, I would say the same thing about Powell now that McCain said about Greenspan back then.
Few words without panic
Powell is a much better one in my opinion communicator then Alan Greenspan, Fed chairman from 1987 to 2006, who is known as a master communicator because he had the gift of using many words without being clear or without the outside world being able to understand what he was actually saying. Powell, on the other hand, uses few words to say a lot without causing panic in the markets. That, in my view, is much more difficult to do than what Greenspan did. Take this week.
Powell delivered the news that monetary policy will become less loose. The very loose policy was the driving force behind price increases in recent years. Yet prices did not fall because of Powell, in fact, they continued to rise. Communication with the financial markets and the outside world will be very important in 2022. No one can do that better than Powell.