Societe Generale with the note
Monetary policy has been in an easing phase since the Fed’s first rate cut in July 2019, with the policy – rate staying at the zero bound since March 2020. Financial conditions have eased globally, touching historic lows, with pandemic – induced peak quantitative easing (QE) and other emergency stimulus injecting significant liquidity into the system.
With the rollout of mass vaccinations against COVID-19 and a seemingly robust recovery of the economy, markets are anticipating a reversal in monetary policy from one of accommodation to tightening, partly as a countermeasure to the growing concern about rising inflation. Yet central banks are still pursuing a lower-rates-for-longer policy, with the Fed indicating that it will maintain the low policy rate until 2023. With the significant build-up of central bank balance sheets, any explicit tightening through policy rate hikes is likely to
be gradual, as QE tape ring and balance sheet contraction may first lead the way.
