Monetary policy works with a lag. The tightening that’s already happened is still working its way through the system. It’s like a massive oil tanker. It takes a long time to turn it around.
Also, the Fed doesn’t set policy in a vacuum. It’s the most influential central bank in the world. Its tightening has also created the need for other central banks to tighten or pause their easing in order to match it.
The global phenomenon is neatly illustrated in the chart below. This chart combines the QE and QT of the BoE, BoJ, Fed and ECB using colors to show the individual contributions of each central bank.
The Fed’s QE1 (2008), QE2 (2010) and QE3 (2012) stand out clearly in the three blue spikes. The BoE also had three waves of smaller magnitude shown as green waves from 2010–2016. The BoJ started late (in 2011) but has never stopped since, as shown in the red wave. Finally, the gray wave is the ECB. They were also late to the party but made it up in volume.
What’s important about this chart is not where we’ve been but where we’re going. The Fed is already in negative territory (the blue wave below the “0” line starting in 2018). The BoE is neutral but is also ready to go negative. The ECB and BoJ are still positive but trending down sharply; the ECB will go negative this year, according to current plans.
The black trend line shows the aggregate of all four central banks. It crashed in 2018 (mostly because of the Fed) and will go negative globally in 2019.
If another crisis happens, the Fed will cut rates back to zero. But it won’t be enough. Then they’ll have to abandon QT and go back to QE4. Other central banks will follow the Fed’s lead.
The Fed doesn’t see this coming. But you can. You should prepare now for the inevitable crackup.
