How long before the ECB and Federal Reserve ease monetary policy again?

Yesterday brought something of a change to the financial landscape and it is something that we both expected and to some extent feared. Let me illustrate by combining some tweets from Lisa Abramowicz of Bloomberg.

Biggest one-day drop in 10-year yields in almost a year…..Futures traders are now pricing in a 47% chance of a rate cut by January 2020, up from a 36% chance ahead of today’s 2pm Fed release……….More steepening on the long end of the U.S. yield curve as investors price in more inflation in decades to come, thanks to a dovish Fed. The gap between 30-year & 10-year U.S. yields is now the widest since late 2017.

I will come to the cause of this in a moment but if we stick with the event we see that the ten-year US Treasury Note now yields 2.5%. The Trump tax cuts were supposed to drive this higher as we note that it was 3.24% in early November last year. So this has turned into something of a debacle for the “bond vigilantes” who are supposed to drive bond markets lower and yields higher in fiscal expansions. They have been neutered yet again and it has happened like this if I had you over to the US Federal Reserve and its new apochryphal Chair one Donald Trump.

US Federal Reserve

First we got this on Wednesday night.

The Federal Reserve decided Wednesday to hold interest rates steady and indicated that no more hikes will be coming this year. ( CNBC)

No-one here would have been surprised by the puff of smoke that eliminated two interest-rate increases. Nor by the next bit.

The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019. The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019. ( Federal Reserve).

So as you can see what has become called Qualitative Tightening is on its way to fulfilling this description from Taylor Swift.

But we are never ever, ever, ever getting back together
Like, ever

More specifically it is being tapered in May and ended in September as we mull how soon we might see a return of what will no doubt be called QE4.

If we switch to the economic impact of this then the first is that it makes issuing debt cheaper for the US economy as the prices will be higher and yields lower. As President Trump is a fiscal expansionist that suits him. Also companies will be able to borrow more cheaply and mortgage rates will fall especially the fixed-rate ones. Here is Reuters illustrating my point.

Thirty-year mortgage rates averaged 4.28 percent in the week ended March 21, the lowest since 4.22 percent in the week of Feb. 1, 2018. This was below the 4.31 percent a week earlier, the mortgage finance agency said.

The average interest rate on 15-year mortgages fell 0.05 percentage point to 3.71 percent, the lowest since the Feb. 1, 2018 week.

Next week should be lower still.

Euro area

This morning has brought news which has caused a bit of a shock although not to regular readers here who recall this from the 27th of February.

The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous.

The money supply numbers have worked really well as a leading indicator and better still are mostly ignored. Perhaps that is why so many were expecting a rebound this morning and instead saw this. From the Markit PMI business survey.

“The downturn in Germany’s manufacturing sector
has become more entrenched, with March’s flash
data showing accelerated declines in output, new
orders and exports……….the performance of the
manufacturing sector, which is now registering the
steepest rate of contraction since 2012.

The reading of 44.7 indicates a severe contraction in March and meant that overall we were told this.

Flash Germany PMI Composite Output Index at 51.5 (52.8 in Feb). 69-month low.

There is a problem with their numbers as we know the German economy shrank in the third quarter of last year and barely grew in the fourth, meaning that there should have been PMI readings below 50, but we do have a clear direction of travel.

If we combine this with a 48.7 Composite PMI from France then you get this.

The IHS Markit Eurozone Composite PMI® fell from
51.9 in February to 51.3 in March, according to the
preliminary ‘flash’ estimate. The March reading was
the third-lowest since November 2014, running only
marginally above the recent lows seen in December
and January.

Or if you prefer it expressed in terms of expected GDP growth.

The survey indicates that GDP likely rose by a modest 0.2% in the opening quarter, with a decline in manufacturing
output in the region of 0.5% being offset by an
expansion of service sector output of approximately

So they have finally caught up with what we have been expecting for a while now. Some care is needed here as the PMI surveys had a good start to the credit crunch era but more recent times have shown problems. The misfire in the UK in July 2016 and the Irish pharmaceutical cliff for example. However, central bankers do not think that and have much more faith in them so we can expect this morning’s release to have rather detonated at the Frankfurt tower of the ECB. It seems financial markets are already rushing to front-run their expected response from @fastFT.

German 10-year bond yield slips below zero for first time since 2016.

In itself a nudge below 0% is no different to any other other basis point drop mathematically but it is symbolic as the rise into positive territory was accompanied by the Euro area economic recovery. Indeed the bond market has rallied since that yield was 0.6% last May meaning that it has been much more on the case than mainstream economists which also warms the cockles of one former bond market trader.

More conceptually we are left wonder is the return to something last seen in October 2016 was sung about by Muse.

And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole

If we now switch to ECB policy it is fairly plain that the announcement of more liquidity for the banks ( LTTRO) will be followed by other easing. But what? The problem with lowering interest-rates is that the Deposit-Rate is already at -0.4%. Some central bankers think that moving different interest-rates by 0.1% or 0.2% would help which conveniently ignores the reality that vastly larger ones overall ( 4%-5%) have not worked.

So that leaves more bond buying or QE and beyond that perhaps purchases of equities and commercial property like in Japan.


I have been wondering for a while when we would see the return of monetary easing as a flow and this week is starting to look a candidate for the nexus point. It poses all sorts of questions especially for the many countries ( Denmark, Euro area, Japan, Sweden. and Switzerland) which arrive here with interest-rates already negative. It also leaves Mark Carney and the Bank of England in danger of another hand brake turn like in August 2016.

The Committee continues to judge that, were the economy to develop broadly in line with those projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Although of course it could be worse as the Norges Bank of Norway may have had a false start.

Norges Bank’s Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.0 percent:

But the real problem is that posed by Talking Heads because after the slashing of interest-rates and all the QE well let me hand you over to David Byrne.

And you may ask yourself, well
How did I get here?


17 thoughts on “How long before the ECB and Federal Reserve ease monetary policy again?

  1. Yes we are here again after ten years of repeating the same failed policy the solution is to well….. do the same again, the problem is caused by too much debt? the solution is more debt!!!

    The introduction is not in doubt, only the timing, and that will coincide with the re-flation of assets – housing and stocks, if people cannot afford to buy a property, more stimulus will be provided to ensure they can, anyone still holding what is left of their savings outside of the magic temple of inflation will be encouraged to spend it(why not buy another property?then rent it out -the yield no matter how low cannot be less than the bank interest!) or have it stolen by a combination of inflation, taxation and negative interest rates.

    The alternative is for the system to correct itself as it always was allowed to in the past, but this time it cannot be allowed to happen since the bubble has grown so large if it burst now it would probably destroy the entire economic system and more importantly the banks. The inevitable backlash would mean those in control of it would be blamed and have the levers of power taken off them.
    The wheel goes round and round when it stops nobody knows, place your bets on the stocks/housing wheel-everyone’s a winner -government guaranteed!

    • It is now basically impossible to save, especially if you are a higher rate tax payer, as your money just descreases against inflation every year. This is not helped by the new tactic of mobile phone companies increasing your contract at RPI rate each year. Nice self fulfulling prophesy there.

      Apart from buying yet more houses you can actually get a reasonable return by installing forms or renewable energy and/or hyper insulating you house. That at least reduces Gas and Electric bills which are also rising higher than inflation.

      If you know your children are going to get a well paid job then paying their fees is also a form of investment but apart from that your only option is to invest in local small companies that the big players don’t know about and where you can win the information asymmetry game.

      We would be Japan if it weren’t for the increasing population size.

  2. So a recession is upon us it would seem for them to be doing this. Western govts. must be fully aware that more QE will stoke the asset bubble thus creating more so called populism … can’t be long now until we find out if they will resort to helicopter money for infrastructure projects or just reward themselves.

    • Hi Arthur

      There are daily RAF Chinook flights including in the evening over Battersea so I do wonder from time to time if they may be filled with cash under the instructions of the Bank of England. But in reality Helicopter Money is more likely to come via the routes you suggest.

  3. The higher the debts, the lower rates need to be and smaller increments to change, for the Monetary Policy Transmission mechanism to work.

    I still believe the only way out of this is significantly higher taxes on the wealthy and re-distribution or debt repayment. We effectively need an asset reset in parallel using fiscal means. Capital controls and balanced trade rules are required on the international stage.

    By definition, for capitalism to work with banks and accountants at its heart, an interest rate is required or we print our way to malinvestment forever.

    To me, the latest econ. theory, MMT, seems to be just another ruse (after Keynesian economics, ‘trickle down’, ultra low rates, tax avoidance, QE etc.) by the rich, to maintain their outlandish gains, by keeping the plates spinning and asset prices elevated. It follows a long line of well supported and quickly adopted theories that suit those at the top. I include Malthus and Darwin in this ‘elitist’ set, that allowed Parliament to ignore famines in Ireland and India. I would still argue to this day that it wasn’t ‘national socialism’ that caused the second world war, but the ignorant adoption of simplistic Darwinian principles by Germany in the likeness of a British Empire.

  4. Today I shall devote my comment form of petition for Shaun to bring back his catchphrase ‘There is a fair amount to consider here’. The reason for this is as we all take a breath before reading the comment and think exactly that so it flows with the though. So Vote up for Bring It Back or down to keep it away. You know what needs to be done.

  5. Shaun,

    Wolf Street website indicating that the FED switching out of mortgage backed securities (MBS) back to Treasury securities – nervous of.the real estate bubble?

    • Hi Chris

      Yes there will be some switching.

      “The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run………Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.”

      As they have some US $1.6 trillion of MBS it will be quite some time before they are rid of them all at that pace so I think it is more of a desire to tidy that area up. Also letting some bonds mature gets them slowly out of the credit risk generally. Also buying the Treasuries will help the fiscal policy of the US government.

  6. Hello Shaun,

    They’ll have to do something soon, assets are teetering on the edge !

    the wages increase – wasn’t that or will that be taken up with the compulsory pensions contributions ?

    Can’t see them doing anything about car or student loans , unless relief against tax for the Banks

    What ever can be done to prop them up will be done….

    and MSM will put a lot of spin on it ……

    so we’ll end up with a long hot summer , some say cruel……

    but no doubt MC and the BoE crew will thinking of stepping out ……

    and be thinking of no limits to QE

    but you know , things might get a little crazy by then …

    but MC will say he’s go the power to fix this

    as he’s not scared

    because with QE every counts in large amounts

    Enjoy the weekend folks 🙂


    • Yes he’s very brave when it comes to making decisions that destroy peoples savings and pensions thru inflation and a collapsing pound, good job his pension is protected against such policies by the bank of England(in 2016 they had to pay the equivalent of 50% of his salary into his pension as a result of bond yields being depressed by his policies, most employees only get around 3-5% of their salary paid into their pension fund by employers) , very very brave.

  7. BBC business live:

    Is a recession in the offing?

    Michelle Fleury
    North America Business Correspondent
    “The bond market yield curve has inverted for the first time since 2007. The rate on short-term three-month-long US government bonds is higher than the rate on longer-term 10 year US government bonds.
    An inversion is seen as a powerful signal of recession. According to the San Francisco Fed, pretty much every recession has been preceded by an inverted yield curve, although there is typically a bit of a lag.”

    World growth slowing, Us interest rates increases now finished Europe in a mess slowing down at a rapid pace now.

    Brexit is causing considerable difficulties for both the UK and Europe and business investment held back.

    What a total mess and there will be more QE interest rates are likely to be cut in the UK imo.

    However I feel this is only the start of a major meltdown the bubble has to burst assets have been allowed to increase on too much debt.

    • Hi Peter

      Signals like that which get latched onto so widely that the mainstream media plug them make me nervous. It all comes down to human psychology or a version of Goodhart’s Law.

      But even the US has slowed up and Euro may be screeching to a halt, so we await the next move…..

  8. Great blog as usual, Shaun.
    Sorry for the late comment, but I just got Steve Hanke’s approving take on Chairman Powell’s press conference last week:
    It sounds reasonable to me, but I don’t follow the monetary aggregates the way you do. I noticed in the press conference Powell said “unresolved policy issues such as Brexit and the ongoing trade negotiations pose some risks to the outlook”. Brexit came up several times in the press conference, but not USMCA and the aluminum and steel tariffs. We have heard that the tariffs would be gone many times; they were supposed to be removed at the last G20 meeting in Argentina, but they are still there, and both Canada and Mexico are reluctant to ratify with the tariffs still in place. It could be they are removed within weeks giving a boost to the American economy. USMCA gets ratified and goes into force. Or none of this happens and a frustrated Trump follows through on his promise to pull the plug on NAFTA and on the FTA. It can’t be easy making monetary policy surrounded by so much uncertainty.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.