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In this illustration photo taken in Bordeaux, France, on March 30, 2016, a man points to a computer screen showing stock information. Regis Duvignau/REUTERS (Reuters) – LONDON, July 1 (Reuters) – The Federal Reserve’s recent hawkish shift has alerted world markets to the possibility that policymakers will soon begin withdrawing monetary and fiscal stimulus, raising the risk of hasty action that could suffocate the economic recovery before it is fully established. Officials from the Federal Reserve have pushed forward their forecast for interest rate hikes in the United States from 2024 to 2023, and have begun discussions on how to halt the crisis-era bond purchase. find out more Norway’s rates could be raised as soon as September, while experts in New Zealand are anticipating a rate hike in September. Jens Weidmann of Germany and Robert Holzmann of Austria were the first European Central Bank executives to openly discuss reducing the bank’s 1.85 trillion euro ($2.2 trillion) pandemic emergency stimulus this week. find out more Investors are becoming concerned after premature monetary tightening to manage inflation following the global financial crisis in 2008 harmed economy, prompting central banks to reverse course. “It’s critical to recognize that it’s preferable to keep monetary stimulus in place for too long than to remove it too soon,” said Guy Miller, chief market strategist at Zurich Insurance Group. “The ECB will be well-positioned to deal with inflation if it rises and the economy becomes too hot. If you remove stimulus too soon, the situation will become quite challenging.” As the debt crisis raged, the ECB raised rates in April and July 2011, only to lower them four months later. find out more In 2015, the Fed began raising interest rates, which many analysts now see as a policy mistake that has unnecessarily slowed the post-crisis recovery. find out more According to a Russell Investments second-quarter survey of fund managers released last week, 50% of 72 respondents expect the Fed to keep its inflation guarantee, down approximately 10% from Q1. Inflation and Treasury yields are expected to rise. “There are parallels with the past, which is really good for markets right now,” said Russell Investments’ global head of fixed income, Gerard Fitzpatrick. “We’re already starting to see a sense of that coming through,” he added, citing increased economic growth and inflation. In the United States and Europe, key indicators of business activity have reached new highs in recent years. According to the new 5 percent inflation reading in the United States, inflation is also making an appearance. find out more One concern is that if the Fed becomes less dovish, other central banks will follow suit. WARNING But it’s possible that policymakers should focus on the consequences of prematurely removing fiscal support. Government stimulus during the financial crisis paled in comparison to the massive stimulus unleashed following COVID-19. In some countries, such as Europe, stimulus was soon phased out as austerity took hold. According to McKinsey & Company, governments contributed $10 trillion for stimulus in just two months last year, and some nations’ reaction as a percentage of GDP was roughly ten times what it was post-2008. After the financial crisis, the mistake, according to David Riley, chief investment strategist at BlueBay Asset Management, was dialing back fiscal support too soon, leaving central banks to shoulder the responsibility of supporting economies. He went on to say that central banks were appropriate to start thinking about reducing their massive monetary stimulus. “My main concern is that it (tapering) is interpreted by governments as a sign that they won’t be able to provide more fiscal support as the monetary policy backstop is removed, and they start worrying about bond vigilantes,” he said, referring to investors punishing squandering governments by raising borrowing costs in bond markets. “The danger is that we go back to austerity too soon.” Last week’s $559 billion infrastructure package in the United States was smaller than expected, with Republican resistance likely to constrain prospects for additional stimulus. The German election in September could also be crucial. Although analysts believe Germany will not be able to balance its books anytime soon, the ruling conservative Christian Democrats (CDU), who are now leading in polls, have promised tight public finances. find out more The premature removal of fiscal support that ECB chief Christine Lagarde has warned about is exactly what the CDU manifesto calls for, according to Morgan Stanley’s head of European economics Jacob Nell. “We believe they will work this out in the coalition talks after the election,” he said, “but you should be aware that there is a real chance of a swift return to budgetary consolidation.” Analysts found indicators that governments were determined to keep funding coming in general: This year, EU budgetary restrictions were again postponed, and according to BofA, the US government will spend $879 million every hour in 2021. While the Bank for International Settlements warned this week in its annual report about the “daunting obstacles” that policymakers will face as they seek to normalize policy, the flood of cheap central bank money currently allows major economies to fund recovery at a low cost. find out more “Policymakers have learned from their blunders,” said Miller of Zurich. Dhara Ranasinghe and Sujata Rao contributed reporting from London; Stefano Rebaudo contributed additional reporting from Milan; and Mark John and Catherine Evans edited the piece. The Thomson Reuters Trust Principles are our standards./nRead More

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