Is central bank tightening different?
- A key change in 2017 was that many major central banks either tightened policy, or signaled an intention to tighten in 2018. For most of the past four decades, the focus of central bank policy has tended to be interest rates. Since the financial crisis, money printing and regulation have assumed greater importance than before.
- The first change in policy is that central banks can and will operate a variety of policy levers. Focusing on interest rates alone is unhelpful. We may see some central bank easing of policy through the regulatory channel, which may offset some of quantitative and monetary policy tightening.
- The second change in policy is the objective of central banks. In the past, a tightening cycle aimed to reduce inflation by slowing demand (and thus growth). Reducing the pricing power of companies was, implicitly, a desired policy goal.
- This tightening cycle is not aimed at reducing inflation, growth or companies' pricing power. Instead, central banks are trying to maintain today's inflation, growth and pricing power by achieving economic balance. The change in objective means that this tightening cycle has different implications for asset markets from past cycles.