In response to the 2007-2009 financial crisis, central banks opened up the monetary spigots. They employed a creative strategy of QE (quantitative easing), the purchasing of financial assets as a way of creating new money in hopes of stimulating economic recovery and keeping the demon of deflation at bay, when their usual monetary policy tools were rendered ineffective.
The overall effectiveness of several rounds of QE as an economic stimulus is debatable. What is clear is that ballooning central bank balance sheets have been a boost to asset prices. Since 2013, Japan has taken it to a new level.
See the chart below, by tradingeconomics.com, of the Bank of Japan’s burgeoning balance sheet.
Ahead of the Federal Reserve and Bank of Japan meetings this week, market participants may be wondering if the pumping of liquidity can continue to prop up asset prices, given below rock bottom interest rates and recent rumblings and stirrings of stock market volatility.
The esteemed Chris Carolan at spiralcalendar.com points out that should markets fall sharply, there is evidence that central bankers will step in to try to juice the markets with a shot of adrenaline.
So will central banks give the markets a shot of salvation or will they throw cold water on dependent buyers’ excitement by returning to normalcy?
If stock prices head south fast and furious enough, I expect them to try their darnedest to feed the markets. But don’t expect their monetary largesse to insure smooth sailing. Ultimately, markets will go where they want whether central bankers like it or not.
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