LONDON, July 1 (Reuters) – A hawkish turn by the Federal Reserve has woken up world markets to the prospect that policymakers might soon start withdrawing monetary and fiscal stimulus — and the risk of too-hasty action that could choke off the economic recovery before it is secured.
Fed officials have brought forward expectations for U.S. interest rate rises to 2023 from 2024 and opened talks on how to end crisis-era bond buying.
Norway could lift rates as early as September, while strong New Zealand data has prompted economists to bring forward rate hike expectations there. Germany’s Jens Weidmann and Austria’s Robert Holzmann this week became the first European Central Bank officials to openly debate winding down its 1.85 trillion euro ($2.2 trillion) pandemic emergency stimulus.
Investors are starting to feel wary — premature monetary tightening to contain inflation after the 2008 global financial crisis hurt growth, forcing central banks to backtrack.
“It’s important to acknowledge that it’s better to keep in place monetary stimulus too long rather than taking it away too early,” said Zurich Insurance Group’s chief market strategist Guy Miller.
“If inflation picks up and the economy runs too hot, the ECB will be well-positioned to tackle it. If you take stimulus away too early, the situation is going to become very difficult.”
The ECB lifted rates in April and July 2011, as a debt crisis raged, just to cut them four months later.
The Fed started raising rates in 2015, a move many analysts now view as a policy error that unnecessarily stalled the post-crisis recovery.
A Russell Investments second-quarter survey of fund managers last week showed 50% of 72 respondents expect the Fed to deliver its inflation promise, down about 10 percentage points from Q1. They expect higher inflation and Treasury yields.
“There are parallels with the past and that’s very useful for markets right now,” said Gerard Fitzpatrick, global head of fixed income at Russell Investments.
“Concern about the Fed hiking extra early, we’re already starting to see a sense of that coming through,” he added, noting rising economic growth and inflation.
Key measures of business activity in the United States and Europe are at their highest in years. Inflation too is rearing its head, judging by the latest 5% U.S. inflation print.
One concern is that a less dovish Fed could pave the way for other central banks to follow.
WARNING
But perhaps it’s the lessons of withdrawing fiscal stimulus too soon that policymakers really need to heed.
Government stimulus after the…
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