What Happens When Central Banks Stop Propping Up Markets?

Myriad easy money policies have supplied the global markets with a steady supply of newly created cash that has been recycled into stock and bond markets

Dave Sekera, CFA 20 September, 2016 | 10:52AM
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Take the Federal Reserve’s various quantitative easing programs that began almost eight years ago and add the European Central Bank’s recent negative interest rate policy and asset-purchase programmes. Then include the seemingly endless easy monetary programmes from the Bank of Japan, and you can see the markets have long been feeding on a liquidity diet.

Myriad easy money policies have supplied the global markets with a steady supply of newly created cash that has been recycled into stock and bond markets. As this newly created money has been invested, it has helped to send interest rates across the world to historical lows, in many cases generating negative yields, and to push developed market stocks to near all-time valuations – especially in the US.

Will Central Banks Continue to Feed Markets?

The markets’ dependence upon ever easier monetary programmes is starting to be put to the test as investors appear to be concerned that central banks may no longer be as willing to continually force-feed the markets increasingly larger portions of liquidity. The anxiety began after the ECB decided to hold its monetary policy steady earlier this month, as opposed to loosening it further, as expected by the market.

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About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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