Simultaneous central bank tightening – what does it mean?
The main central banks of the world are moving to tighten policy. This includes tightening quantitative policy. What does this mean for investors?
Quantitative policy should never be considered as money supply alone. Quantitative policy is about money supply and money demand. Quantitative policy easing did not lead to hyperinflation because rising cash supply matched rising cash demand. It is printing too much money that creates inflation, and this did not happen.
What mattered with easing now matters with tightening. Consumers and companies are not hoarding cash as they did after 2008. Central banks are slowing the supply of cash to match this. There are three results for markets.
- The supply of cash to financial markets need not alter. If central banks correctly balance cash supply and demand in the economy, cash for financial investment may be unchanged.
- As central banks provided liquidity by buying bonds for cash, bond markets will be hit. However, bond investors who only wanted cash after 2008 should return to bonds. The rise in yields is likely to be modest.
- Lower demand for cash is often associated with a general rise in risk appetite. Central bank confidence in the economy may also send a pro-risk signal.