When they write the final history of central banks and the financial crisis, recent weeks will be a prominent late chapter.
Central banks have been looking into the abyss of spiralling negative rates and all-out currency war over recent months – and the last few weeks saw them pull back from the edge. We have previously discussed how corrosive negative rates could be for banks and, potentially, for the financial system at large.
During the March ECB press conference, Mario Draghi acknowledged the danger negative rates would pose to banks and confirmed a shift from “rates instruments to other, nonconventional instruments”. When the BoJ held rates There are suggestions the so-called ‘FANG’ trend is dead. However, these companies were not succeeding because they were part of FANG. The companies were thriving because of strong underlying fundamentals. Amazon.com is doing remarkably well in both elements of its business – e-commerce and the AWS cloud computing. This was not something made up by Wall Street. We could make the same case for many internet and software stocks hit hard lately. Even in slow growth, tech companies are gaining share, adding content to new areas and penetrating new markets. Tech companies can outgrow the economy for years to come because technology is increasing its percentage of the economy. steady five days later, despite a gloomy economic assessment, and added measures to shield banks from its negative rate, it fit the new consensus. With the ECB and BoJ choosing more direct stimulus over the rates-and-currencies channel, many believe the dollar is unlikely to rise much further. The resulting loosening of US conditions may give the Fed wiggle room for two hikes in 2016.
We will see. The past few weeks have seen a major transition in central bank philosophy, and possibly a renewed sense of coordination. So far, markets have been euphoric at this turn away from the abyss and towards some kind of ‘normality’. How this ultimately plays out remains an open question.