In 2017 influential financial regulators of the world pursued different monetary policies. We picked out the main points for you.
The Federal Reserve System
Year 2017 was the last one with Janet Yellen as the Chair of the Board of Governors of the Federal Reserve System. The Senate approved a candidate for this postion nominated by President Donald Trump — a member of the Federal Reserve Board of Governors, Jerome Powell. Information about the future head of the Fed past experience and intentions can be found on Bloomberg.
The Fed began tightening its monetary policy in December 2015. In 2017 the selected policy was continued: the rate was increased three times, from 0.5–0.75% to 1.25–1.50%.
Another important event in 2017 was the beginning of the Fed’s balance reduction: in November the volume of reinvestment was decreased by $10 billion per month. In January of 2018 this level is expected to double. The regulator intends to gradually stop reinvesting into assets purchased in the framework of quantitative easing (QE) at all.
#interesting Institute of International Finance: The reduction of the Fed’s balance by $200 billion will be equivalent to three interest rate increases of 0.25% for emerging markets.
#background In the US the quantitative easing policy was completed on October 29, 2014, with the Fed’s balance sheet at $4.48 trillion. However, the regulator continued to reinvest funds after assets’ maturity, so its balance remained at the same level.
Along with the tightening of the Fed’s policy, the LIBOR rate grew during the year. This rate shows the value of money:
The tightening of the Fed’s monetary policy adversely affected the seriously indebted economies of Asia and Australia, most of whose debts are expressed in dollars. Significant problems arose in China: the number of "zombie companies« has increased.
The European Central Bank
Unlike the Fed, the European Central Bank left unchanged the zero interest rate which was set in March 2016.
At the same time, the regulator has terminated the targeted longer-term refinancing operations (TLTRO) — issue of four-year loans at zero or negative rates. It also announced a reduction of the volume of assets purchases under the QE program from 80 to 60 billion euros.
After the December meeting the ECB confirmed that the trend will continue: in January—September 2018, the regulator intends to buy assets of 30 billion euros a month. However, QE may be continued after September 2018, if inflation in the EU does not rise to the declared goal of about 2%.
The European financial market in 2017 was influenced not only by the policy of the ECB, but also by the adoption of a new regulation — the MiFID II directive.
The Bank of Japan
The Bank of Japan also did not change the rate within a year. It has remained at a negative level of −0.1% since January 2016:
At the same time on January 27, 2017, the Bank of Japan announced its decision to conduct limited expansion of debt purchases on a regular basis to strengthen the yen. The regulator increased the purchase of bonds with maturities of 5–10 years to 450 billion yen ($4 billion) from the planned 410 billion yen.
However, at the end of the year the Bank of Japan began to signal about the future stop of the crisis measures. Deputy Governor Hiroshi Nakaso:
«The regulator has necessary tools and knowledge to develop a smooth exit from the ultra-soft policy — to reduce liquidity in the markets and a huge balance.
The exit from the [program] of quantitative and qualitative mitigation [QQE] is very complex. But I am sure that the Bank of Japan can do this with the help of various tools, expertise and proper communication with markets.
Time to finish off ultra-soft policy will depend on the mood on the market. What tools we will use and in what order will depend on the economy, prices and financial conditions at that time.
The Bank of Japan can learn from the efforts of the US Federal Reserve to stop incentives.»