We view the low-yield environment as secularEven though monetary policy remains incredibly easy, with negative rates in some countries, inflation expectations continue to drift lower. Global bond yields have been trending downward because of structural forces such as lower trend growth, demographics, and debt deleveraging rather than reactions to events such as “Brexit.” Extraordinary global monetary actions have not been able to offset these deflationary pressures.
The perception is growing that monetary policy in several developed economies is reaching its limits. We believe extreme policy experiments such as negative rates will not meaningfully boost either inflation or growth. Instead, they have the potential to increase investors’ risk aversion.
Central banks’ strength is winding downOur long-run outlook for lower, less levered growth implies diminished benefits for any monetary stimulus. Central banks played an unprecedented role in stabilizing economic growth and supporting asset prices after the global financial crisis. But their limited ability to bolster global growth at present is not surprising.
Credit growth and bank lending trail pre-crisis levels even in economies that have made considerable progress in private-sector deleveraging, such as the United States. While the growth of outstanding debt is lower, the stock of debt remains high, constraining future credit-fueled expansions.
Although extraordinary monetary easing should encourage more borrowing, ultra-low and negative rates have squeezed bank profitability and constrained loan supply.
Structural reforms and fiscal policy are needed to boost longer-term growthThe rate of capital formation is low in both the public and private sectors. Notably, government investment has trailed that of the private sector, slowing economic growth in several markets.
At this point, central banks have earned the right to press policy-making peers on structural reforms and programs to boost growth. These policies could potentially enhance economic conditions and inflation expectations more than experimenting with negative rates or “helicopter money.”
Helicopter money is not just monetary policy—central banks can’t spend the money they create. Fiscal policy and congressional action would be required for it to work. Therefore, it may be more effective to start with fiscal policy instead.
Although policy is not converging, it’s not diverging eitherSome believe the four major central banks have diverged as the Federal Reserve raises rates while others contemplate more cuts. Today’s “divergence,” however, looks more like a convergence when compared to historical differences in rates of more than 300 basis points.
The situation is unlikely to change anytime soon. We have long believed U.S. short-term interest rates would be challenged to rise above 1% over the next several years. Other central banks are unlikely to raise rates this decade, making a material rise in government bond yields across the curve unlikely.
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