Why is the Fed so far behind the curve? Other central banks are now making room for “persistent” inflation.
By Wolf Richter for WOLF STREET.
Today, the world saw announcements by two central banks about reducing or ending asset purchases: By the Bank of Canada, its third reduction, and by the Bank of New Zealand which will stop them cold turkey in 10 days – following a slew of similar announcements by other central banks, while the Fed is still fiddling as inflation burns.
The Bank of Canada announced that it would reduce its purchases of Government of Canada bonds to C$2 billion a week, from C$3 billion a week, the third reduction of the same magnitude. It cited inflation, which rose 3.6% year-over-year, a pale imitation of the US CPI jump of 5.4%.
The rhetoric of “transitory” inflation is still there, but room for doubt is being opened up: “The factors pushing up inflation are transitory, but their persistence and magnitude are uncertain,” the statement said.
The first taper announcement came in October last year, when the Bank of Canada said it would reduce its purchases of Government of Canada (GoC) bonds from C$5 billion a week to C$4 billion a week. At the time, it also ended buying mortgage-backed securities. In March 2021, it started unwinding its liquidity facilities, including repos, citing “moral hazard” as reason.
The second taper announcement came in April, when it reduced its purchases of GoC bonds to C$3 billion, citing “signs of extrapolative expectations and speculative behavior” in the housing market.
Unwinding the liquidity facilities caused a sharp drop in the total assets at the Bank of Canada, from C$575 billion in March, to C$484 billion as of the latest reporting week through July 7, even as the purchases of GoC bonds continued at a much slower pace. GoC bonds now account for C$400 billion of the total.
Until the next taper announcement, GoC bond purchases will continue at a pace of C$2 billion a week. This pace is down by 60% from the pace that prevailed until October. Some of the remaining liquidity facilities might continue to unwind:
Reserve Bank of New Zealand stops cold turkey: “least regrets policy”
With the government, which has come under pressure from the biggest housing bubble in the world, breathing down its neck, the Reserve Bank of New Zealand announced today that it would stop its asset purchases on July 23, citing “unsustainable” house price increases as reason. No tapering needed.
The statement said that in addition to “near-term spikes in headline CPI inflation,” driven by “one-off” or “temporary” events, it expects “more persistent consumer price inflation pressure” to build over time “due to rising domestic capacity pressures and growing labour shortages.”
The magnificent housing bubble is now showing up explicitly in the statement as reason for ending QE: “The Committee agreed [with the government] that the recent rate of growth in house prices remains unsustainable.”
It said that some of the factors leading to the unsustainable house price increases have already eased: “more constrained investor demand,” more construction, and “changes to housing tax policies.”
And “any future increases in mortgage rates will further dampen house price growth,” it said. So those higher mortgage rates are coming.
Hence the “least regrets” policy: “The Committee agreed that a ‘least regrets’ policy now implied that the significant level of monetary support in place since mid-2020 could be reduced sooner, so as to minimise the risk of not meeting its mandate.”
Compared to the giants, New Zealand is small, and the Reserve Bank has a small balance sheet, but its QE program was massive, ballooning its total assets by 230% between December 2019 and June 2021, to NZ$84 billion.
Other central banks already started tapering their asset purchases.
The Bank of Japan, one of the biggies, has been tapering its asset purchases for months. By June, its total assets, after months of slowing growth, fell by ¥7.7 trillion ($70 billion) from May, to a still gargantuan ¥717 trillion ($6.5 trillion):
The Reserve Bank of Australia announced on July 6 that it would reduce its weekly purchases of government bonds by A$1 billion a week, to A$4 billion a week.
The Bank of England announced in May that it would reduce its bond purchases from £4.4 billion a week to £3.4 billion a week.
The Riksbank of Sweden announced in late April that it is sticking to its plan to end QE entirely by late this year.
So why is the Fed so far behind the curve, rather than leading, with inflation having surged in recent months at the red-hottest pace since 1982? Why is it still buying mortgage-backed securities, given the biggest housing bubble since this data was tracked? The convoluted rationalizations and denials coming out of the Fed trigger nothing but bewildered head-scratching.
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