The global recovery remains uncertain and the virus is set to leave permanent damage on employers and employees, hence the likelihood is that the monetary policy will stay ultra-loose for a couple of years.
A lot of policies that were viewed as unconventional were used on a wide-scale basis in recent months following the collapse of Lehman Brothers Holdings Inc. Global central bankers are currently understanding that the temporary and unconventional policies are proving to be conventional and long-lasting.
The financial crisis in 2008 and the coronavirus pandemic in 2020 has forced the Federal Reserve, European Central Bank, and other central banks across the globe to become more innovative and aggressive to protect the economy from recession.
The collapse Lehman Brothers Holdings Inc. witnessed the return of policies that were used wide scale for the first time like quantitative easing. The central banks are adopting unconventional measures like the Fed buying different types of bonds, ECB getting creative with different interest rates, and Australia adopting Japanese style efforts to control bond yield.
The monetary policymakers are working closely with their fiscal counterparts to prop up economies despite the traditional separation of responsibilities. The potential steps include directly financing government budget deficits, which is a key idea of the Modern Monetary Policy. The policymakers are resisting such approaches for now, but are currently stretching their existing measures to the extremes.
According to the Economists of the Bank of America Global Research, as of the end of July, the central banks have cut interest rates 164 times in 147 days and committed 8.5 trillion dollars in stimulus. The Federal Reserve responded to the pandemic with similar policies as those of 2008 but far faster and even went further. Its benchmark was slashed virtually to zero and resumed buying government bonds, as well as widening the emergency lending authority to aid municipalities, small and medium-sized companies, and large corporations. The balance sheet of the Fed is now at $7 trillion, compared to $4 trillion in January and the previous peak of $4.5 trillion in 2015.
The unconventional becoming the new conventional resulted in the central banks facing fresh challenges. The extreme stimulus has worked well on the way in, but exiting will prove to be harder as the first signs of rising inflation will be a test.
