Towards normalisation of the monetary policy?

In August, the eyes of the market were on the signals from the annual symposium in Jackson Hole, where hints of a likely reduction in the US central bank’s asset purchases were expected.

For the month as a whole, the US S&P 500 Index rose by 3.0 per cent measured in USD, while the European Stoxx 600 Index increased by 2.2 per cent measured in EUR and the Nordic VINX Index fell marginally by 0.4 per cent measured in NOK. Here in Norway, the Oslo Stock Exchange (OSEBX) rose by 0.7 per cent.

Normalisation of the monetary policy

Based on a desire to support the economy during the Covid crisis, an unusually expansive monetary policy has been implemented worldwide, not least in the USA. The US central bank (FED) has bought bonds for USD 120 billion each month. The increased liquidity has also found its way into other risk assets, such as real estate and shares. Due to the strong economic recovery, the FED is now expected to normalise its monetary policy. At the FED’s annual conference in Jackson Hole, Federal Reserve Chairman Powell also confirmed that they aim to start a gradual reduction (tapering) during the year.

Monitoring the labour market

The labour market is one of the most important factors monitored by the FED when considering tapering. Wage growth is a joker in the debate on whether or not inflation is temporary. If the labour market tightens, there is a risk of rising inflation expectations, which means faster tapering. However, the labour market report issued after Jackson Hole was weak and the Delta variant of the virus remains a risk - indicating slower tapering of the asset purchases.

Subtle balance

The general view is that there will be tapering in which asset purchases are reduced by around USD 15 billion per month. This means it is initially the rate of growth in the FED balance sheet that is reduced, not the level. On the way, the FED has to balance several considerations. Over the past 18 months, the FED has printed more money than it did during the first three quantitative easing programmes.  Continued asset purchases may contribute to the development of financial imbalances, or a risk of inflation. At the same time, Powell wants to safeguard the labour market and must also take into account that too rapid tapering may frighten the financial market.

The road ahead …

The continued strong company earnings and economic recovery together with the low returns from alternative assets mean that shares still appear to be a good investment alternative.

«When I was 5 years old, my mother always told me that happiness was the key to life. When I went to school, they asked me what I wanted to be when I grew up. I wrote down ‘happy’. They told me I didn’t understand the assignment, and I told them they didn’t understand life.»
John Lennon