The global economic and financial crisis which has been raging for the past seven years passed another significant milestone on Wednesday when the US central bank, the Federal Reserve, ended its latest bout of bond buying, namely quantitative easing mark 3.
Over most of the past five years, the Federal Reserve has been engaged in three bond-buying programmes, which effectively represents the printing of new money in a desperate attempt to inject liquidity into the US banking system and the general economy. Such policies are highly unorthodox and unusual but are symptomatic of the crisis in which that economy has found itself following the mad financial policies of the noughties which culminated in the implosion of the sub-prime mortgage market in the summer of 2007.
The markets have been nervous about the gradual easing or ‘tapering’ of this programme for some time but its ending should not be seen as a significant source of concern. In fact it should be greeted with a sense of relief because its ending does signify that it has to some extent worked and that the economic recovery is now becoming more sustainable.
A couple of years ago, the chairman of the Fed stated that monetary policy would remain very accommodative until the unemployment rate reached 6% of the labour force. This has come to pass with the rate down at 5.9% and, earlier this year, employment levels breached the pre-crisis level, hence the ending of quantitative easing.
The big question now is when the central bank will move away from the zero-interest rate policy that it has pursued for a prolonged period. The state of the labour market has been a crucial element of its thinking for some time, but it stated this week that the “underutilisation of labour resources is gradually diminishing”. This statement represents a marked change from its utterances on the labour market for quite some time now.
Furthermore, the Fed would have been buttressed by survey results earlier this week showing consumer confidence at a seven-year high ahead of the crucial holiday season, Thanksgiving and Christmas.
The US consumer has been the most reluctant part of the economic recovery story over the past three or four years and if this is starting to change as confidence readings are suggesting, then the monetary authority will feel more confident about the wisdom of what it started this week.
The big story for financial markets in 2015 will focus on when the Fed will move away from its zero-interest rate policy. It could well come in the first half of the year based on current economic indications.
The US story stands out in marked contrast to what is happening in the eurozone. Growth in the region remains stuck in the mire with unacceptably high levels of unemployment and a gradual descent towards the evil empire that is deflation. Eurozone policymakers only very recently took interest rates down close to zero and are only now commencing a very limited form of bond buying, which is nowhere close to US-style quantitative easing.
The contrast between US and eurozone policymakers is very stark. US policymakers have been very proactive in addressing the economic crisis, believing that risks are worth taking to get economic growth moving. On the other hand, eurozone policymakers have been preoccupied with inflationary risks, which have been and continue to be non-existent, and with fiscal austerity measures. They fail to realise that the best way out of a debt crisis is through economic growth. Eurozone policymakers remain stuck in a dangerous time-warp.
Thankfully in Ireland, our policymakers have seen the light, as demonstrated by the recent budget. They correctly realise that the consumer is by far the most vulnerable and fragile part of the economic recovery. The retail sales data this week on the surface looked reasonable, but when car sales are excluded, the value of retail sales in the first nine months of the year was just 1.5% higher than last year. This signifies a personal sector that is understandably still fragile and in need of tender loving care.
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