The myth of an independent central bank
Trying to get the right investment in this pandemic world requires careful scrutiny of major policies Central bankThe Fed took the lead in rescuing from the virus crisis in March 2020. The Bank of Japan and the European Central Bank have always been an important source of support for financial markets and the economy.
The Bank of China has adopted stricter policies than other banks while avoiding economic recession.As we expected, China’s stock market has been hit by currency tightening and attacks on industries such as the following property.
Bond purchases and low interest rates drive up fixed-income securities and encourage people to buy higher-yielding stocks that look cheap compared to the low returns on bonds.
Today’s stock price rise is largely due to the central bank’s decision to lower interest rates to keep the asset market flooded with cash and to keep long-term borrowing rates low. It was the Fed’s decision to create at least $3 trillion to offset the black hole that was blocked, which prompted me to start investing in the summer of 2020, hoping that with the support of all the cash, the stock market will recover sharply.
As this year draws to a close, the question is whether they will extract For the market, the stimulus is too fast, because they try to curb the inflation sprites they nurtured. So far, due to the continued popularity of the United States, we have brought good returns to investors.
The market is beginning to believe that the major central banks are independent, which is a good thing. The European Central Bank used the idea of ??independent experts to set short-term interest rates to keep inflation down-partly imitating the Bundesbank. The Bank of Japan and the Federal Reserve also have an inflation target of 2%.
The noon of the independent central bank’s idea of ??providing discipline appeared in the first decades of this century. The theory states that they will be managed by wise and impartial people who understand the economy and the market well, know when to expand money and credit, and when to adjust interest rates to contract in order to keep the inflation rate at around 2%.
It is difficult to know why people believe this. After all, the boom and bust of the banking industry left serious wounds to the economy. The central bank allowed commercial banks to expand credit and exaggerate the value of their assets, but it stopped abruptly in 2008, leading to bank failures and triggering the market and the Great Recession. The central bank tried to blame commercial banks for excessive behavior without properly accepting their role in prosperity and depression.
It turns out that it is difficult to find these people with unique insights who can call it well and avoid major mistakes. They are usually appointed by the president or prime minister with the help of a finance minister who has a political interest in the policies they follow. This year, several major central banks predict that the inflation rate will be much lower than the result.
Even in this legendary era of independence, it is difficult to determine a completely independent central bank. Today, we can see the government’s tendency to have a clearer influence.
Recep Tayyip Erdogan, President of Turkey, Curved He has the power to appoint the governor of the central bank and seek an appointment that can keep interest rates low or lower them, regardless of inflation or currency pressures. In all its statements, the People’s Bank of China unabashedly believes that its mission is to implement China’s ideas and policies. president Xi Jinping And the Communist Party.
For a long time, the Fed itself has a dual mission-to curb inflation and ensure decent growth. When there is some tension between these two goals, the Fed must make judgments and usually listen to the government.
Some central banks are related to extravagant fiscal policies. In some Latin American countries, they were unable or unwilling to offset the government’s excessive behavior and ultimately helped or endured very high inflation rates. Argentina and Venezuela are not good advertisements for the work of their central banks.
Joe BidenThe President of the United States has begun to reform the Federal Reserve, using his power to appoint board members. He seems to have negotiated a policy platform for the new Federal Reserve between the current chairman Jay Powell and the newly appointed vice chairman Lyle Brainard, who hopes to push it to the full Democratic agenda.
The new Fed will take its responsibility for net zero carbon emissions and social inclusion more seriously, and may adopt more stringent regulatory measures on banking activities. Both the chairman of the Republican Party and the vice chairman of the Democratic Party hope to run the economy as warmly as the market permits and seek a stronger and more lasting recovery. Both are worried about inflation, and Biden has been severely criticized for his inflation rate of over 6%.
The market needs to adapt to a more political central bank. Mexico is getting a new central bank governor from the government’s own ranks. The European Central Bank is the custodian of EU projects and will always consider the conditions needed to support and advance economic, monetary and political unions. What needs to be assured for the market is that any given central bank cooperates well with the government and takes a responsible but market-friendly view among them.
FT funds once again benefited from American exceptionalism. In American exceptionalism, the combination of great technology companies and very loose monetary policy has brought considerable gains.
As we enter the end of 2021, people are more concerned about how quickly the Fed needs to withdraw its stimulus measures and how long inflation will remain high. However, it seems that the world economy will continue to be supported by zero interest rates and substantial additional funding from the Bank of Japan and the European Central Bank. The People’s Bank of China does not want to trigger a recession, but it is helping the government to cut the tall poppies in the corporate world, especially in the real estate sector.
Now is the time to be cautious, not panic. The Fed will try to get rid of high inflation through negotiations, and Biden will seek solutions to solve many supply bottlenecks to help. The Fed has a new political agreement to find a way to enable the Democrats to promote their vision of recovery and social justice.
Sir John Redwood is Charles Stanley’s chief global strategist. FT Fund is a virtual investment portfolio that aims to demonstrate how investors can use a wide range of ETFs to access the global stock market while reducing investment costs. [email protected]