Time for central banks to step away -- or step up?
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The Bank of England showed today that it knows how to keep stock and bond market rallies going. The central bank surprised markets by boosting plans to buy British government bonds for its own account -- a direct attempt to pull down long-term interest rates.
The upshot is that the Bank of England isn’t convinced that the economy is healing fast enough to warrant less central bank help.
By contrast, the Federal Reserve is widely expected to halt its program of buying U.S. Treasury bonds when purchases reach $300 billion in September, the limit the Fed set when it launched the program in March. The Fed has bought $243 billion so far.
The Bank of England said it would expand its purchase program by 50 billion pounds, or $84 billion, to 175 billion pounds.
The move had the desired effect: The yield on 10-year British bonds sank to a four-week low of 3.73% from 3.83% on Wednesday. The FTSE-100 stock index rose 0.9% to 4,690.53, its highest since October.
Central banks worldwide are wrestling with how much more financial help to provide to their economies, after slashing interest rates and providing massive sums to prop up banks. Policymakers’ fear is that they could be setting the scene for a surge in inflation if they keep expanding the supply of money in the financial system.
The European Central Bank today signaled that it doesn’t see a need to do more.
Likewise, the U.S. Fed is expected to end its purchases of Treasury bonds, although it is certain to keep its benchmark short-term interest rate anchored near zero indefinitely.
From Bloomberg News:
The Federal Reserve is set to halt its purchases of up to $300 billion in Treasuries in mid-September as scheduled, and will probably announce the decision next week, two former central bank governors said. ‘They’re clearly not going to extend that program given the improvement in financial markets that’s going on,’ said Lyle Gramley, senior economic adviser with New York-based Soleil Securities and a former governor. The FOMC ‘is unlikely to extend the life of these programs, unless, of course, either the economy or the financial markets take a significant turn for the worse,’ Laurence Meyer, vice chairman of St. Louis-based Macroeconomic Advisers LLC, wrote in a report Tuesday.
It isn’t clear how much the Fed’s purchases of Treasury bonds have helped. The five-year T-note yield, at 2.7% today, is up from 1.92% in mid-March. Still, interest rates might be higher if the Fed hadn’t stepped in.
The Fed is expected to continue buying mortgage-backed bonds to try to keep a lid on home loan rates. But those rates too have risen since March. The average 30-year mortgage rate now is 5.22%, up from a low of 4.78% in late April.
Fed policymakers who believe the central bank has done enough for the economy say rising long-term rates are a sign of improvement rather than something to worry about.
The risk is that they’re stepping back too soon, particularly given consumers’ reluctance to spend money.
-- Tom Petruno