The big central banks are meeting this week … Will they raise their hands on the economy?

Leaders of major central banks are holding meetings this week to discuss the most appropriate date to lift the massive economic support measures imposed last year to avert a “great recession” caused by the Covid crisis.

In this regard, Eva San-Way, fund manager at M&G Investments, underlines that “the withdrawal of monetary and financial support is inevitable. The most important question is timing”.

Here are the main aspects related to the financial policies of the US Federal Reserve and other central banks that will be holding their meetings during the week:

What are the existing procedures?

The Federal Reserve, the European Central Bank and their counterparts in Japan and Britain, among others, have cut interest rates and launched massive asset purchase programs to avert economic catastrophe.

The goal of the programs is to keep the economy running and lower the costs of loans to individuals, businesses and governments.

The Federal Reserve, which begins a two-day policy meeting from Tuesday, reduced interest rates to zero with the onset of the pandemic crisis in March 2020.

In an effort to provide liquidity to the world’s largest economy, it will buy at least $ 80 billion in treasury debt per month and at least $ 40 billion in mortgage-backed securities.

For its part, the European Central Bank has created an emergency program to deal with the epidemic, worth € 1.85 trillion, which allows the bank to buy assets on the financial markets. like bonds, to raise their prices and lower interest rates.

The revised European Central Bank kept basic refinancing operations at zero.

Don’t rush to act

Inflation has increased globally, raising market expectations that central banks may tighten money supply to lower prices and avoid undue pressure on economies.

Central banks in Brazil, Russia, Mexico, South Korea, the Czech Republic and Iceland have raised interest rates this year.

But the Federal Reserve, European Central Bank and Bank of England, which also meet next week, have so far refrained from changing rates.

Officials at the Federal Reserve, European Central Bank and Bank of England have insisted the inflation was temporary and was the result of a rally in prices after falling at the height of the outbreak of the ‘last year.

Policymakers seek to avoid harming economic recovery in the event of a rush to withdraw much support.

What do they say?

Every economic indicator is reflected in the markets, from inflation to unemployment to consumer spending, amid speculation that central banks will adjust their policies before or after the due date.

Meanwhile, bank officials choose their words carefully. In August, Federal Reserve Chairman Jerome Powell said the central bank could “start to slow the pace of asset purchases this year,” but remained silent on the schedule.

The European Central Bank went further this month, deciding to ease the pace of monthly bond purchases, but without changing the size of the plan or its March 2022 expiration date.

Andrew Kenningham, chief European economist at Capital Economics, said the move was “far from a complete reversal”.

The President of the European Central Bank, Christine Lagarde, left no doubt in stating clearly that “the lady will not back down”, referring to herself.

Markets are waiting for clearer indicators from the European Central Bank in December.

Have central banks succeeded?

The global economy is recovering at a time when individuals, businesses and governments are taking advantage of extremely low interest rates.

Meanwhile, governments have injected $ 16 trillion into fiscal stimulus packages around the world, according to figures from the International Monetary Fund.

“We have learned a lot from previous crises and the management of the Covid-19 crisis has been almost perfect from an economic point of view,” said Vincent Yuvins of JPMorgan Asset Management.

“The recovery is intense and significant, and we have not seen widespread unemployment or a wave of bankruptcies,” he added.

The rating agency S&P Global expects the default rate in Europe to decline in the near term, “especially if the downward policy proceeds in an orderly fashion, as expected.”

What are the negative repercussions?

Opponents of a lax monetary policy widely point out that it worsens inequalities by inflating the prices of financial assets and raising the prices of real estate.

The European Central Bank defends its efforts by citing studies carried out by researchers linked to it, who found that its policies helped reduce unemployment and gave a boost to families whose living conditions are rather modest, since they were able to buy real estate thanks to low interest rates.

In a September report, the Organization for Economic Co-operation and Development expressed concern about the potential negative repercussions that an extension of lax monetary policy could have on financial and real estate assets.

“Central bank interventions will only make sense if you avoid a recession,” said Nicolas Veron, an economist at the Petersen Institute and the Bruegel Research Center.

“If it is no longer necessary to avoid a recession, its negative repercussions will be more than positive,” he added.