Central banks will move goal posts to keep QE forever
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Forget the reforms in China, whether the euro EURUSD +0.07% survives, or whether Apple AAPL -0.02% ever gets around to launching that incredibly expensive watch that sends e-mails, plays games, and possibly even tells you what time it is.
Right now, there is only one thing that really matters to the markets. And that is whether central banks will continue with quantitative easing and stick with interest rates at three-century lows — and if not, when they will stop printing money and get rates back to something close to normal levels.
In the U.K., rates were meant to start going up when the unemployment rate dropped to 7%. In the U.S., the Federal Reserve targeted a 6.5% jobless rate. But now the Bank of England is looking at rising real wages as a potential trigger for rates to get back to normal, while the Fed is discussing shifting its target from 6.5% unemployment to 6% or else when an inflation floor has been hit.
The reality is, they will keep moving the goal posts. Once you slash interest rates to zero, and start printing money, it is impossible to stop without doing huge damage to the economy. QE and zero rates are going to be around for a lot longer than most investors have yet realized. The only historical experience we have of this kind of extreme monetary policy is Japan — and it tells us it carries on for two decades and perhaps longer.
Take a look at what has happened in the U.K. When Mark Carney took over from Sir Mervyn King at the Bank of England, he bought with him his much-trumpeted policy of “forward guidance.” Rates would stay at 0.5% at least until the unemployment rate came back down to 7%. Only then would the bank start to edge them back up to the 5% or so that you would expect for a normal economy.
Carney probably thought that moment was safely out in the far distant future. After all, the U.K. still seemed stuck in a deep recession. He might well be safely back in Canada by the time the target was actually met.
As it turns out, however, the U.K. economy has had a stronger bounce back than the bank or anyone else expected. In the third quarter alone, it expanded at 0.8%, the fastest rate among major industrial nations. Given that the U.K. is also good at creating lots of low-paying jobs (although unfortunately not the high-paying sort), unemployment has come down faster than forecast. The latest monthly figures showed unemployment dropping to 7.6% from 7.8%: at that pace, rates will be going up before next spring.
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