The US economy has always attracted the interest of the main financial markets; central banks, governments, and corporations are always sensitive to the trend of interest rates. During the 2008 financial crisis, to contrast low inflation and potential deflation, the FED adopted a quantitative easing strategy, a strong injection of liquidity, through the massive purchase of public bonds and the drastic reduction of interest rates, almost to zero in nominal terms and negative in real terms.
In the following years, the leading central banks continued in this direction, and with this positive impact on the economy, they probably avoided a strong recession. On the other hand, the liquidity injection drastically pumped the financial and commodities markets, and many analysts started to discuss a dangerous speculative bubble. In particular, the QE strategy began with the subscription of 600 bn USD of mortgage-backed securities by a few commercial banks and, in the next years, escalated to a huge investment in treasury bonds, with the consequent increase of the US public debt. In this situation, it was easy for the government to leverage primary markets thanks to the possibility of investors selling for profit and to the interest rate levels. As expected by many economists, the huge liquidity injected, together with the fiscal incentives, triggered strong economic growth, followed, unfortunately, by remarkable inflation.
On the other hand, Europe also experienced a high inflation period after following the same QE strategy. While the US inflation was driven by the demand, a surplus of liquidity compared to the level of supply, in Europe, it was also the consequence of the exogenous shock from the huge increase in commodity prices, the Ukrainian/Russian war and the consequent sanctions against Russia. This scenario contributed to the further deterioration of the EU economy, which was already stressed by the dependency on petrol and gas supplies and the supply chain disruptions experienced during the pandemic. Even if the European central banks initially underestimated this inflationary trend, lately, they have increased the official interest rates, with an immediate impact on the monetary market and the returns curves. The bond investments recorded remarkable losses, especially the long-term bonds, while the share market was more resilient and registered new peaks. The FED and BCE didn’t announce any official interest rate target in this situation. They decided to monitor the inflation trends to return to the acceptable level of 2%. This tight monetary policy contributed to a prompt reduction of the inflation rate in the USA and Europe.
It’s debated whether the tight monetary policy will lead to a recession or a soft landing in the current situation. So far, according to the primary macroeconomic data, neither of these two scenarios has been confirmed, but the markets are scared about the FED’s prudence in reducing the inflation rate. In Europe, the recovery process looks slower even if the inflation rate has almost reached the BCE target level, and governments, entrepreneurs, and markets are constantly pushing for a more substantial cut in interest rates. The macroeconomic data confirmed the BCE delay in following the FED strategy with consequent impact on the Euro/USD exchange rate moving from 1,12 to 1,08, in addition to identifying the FED/BCE approaches that are more focused on monitoring the markets/trends than on formulating clear guidance for the future.
Edited by Prof. Paolo Bongarzoni
Dean Swiss School of Management and Corporate Director
