Slow monetary stimulus detox

Slow monetary stimulus detox

The dynamism of the economic recovery from the pandemic triggered recession has surprised not least the Central Banks. At the same time, a decade of lingering deflation pressure has created a rarely seen tolerance of higher inflation by major Central Banks. The Federal Reserve and the European Central Bank (ECB) are most explicit in this respect by including tolerance for inflation overshooting in their monetary strategy. The cautious approach to withdraw monetary stimulus has for sure its merits. Financial conditions have been a tailwind for economic growth throughout the recovery. At the same time, it is fair to ask if aggressive policy stimulus in still appropriate when ample demand meets insufficient supply in many categories of goods and services. Further, the take-up of the money the Federal Reserve and the ECB are creating by buying bonds appears to remain in the financial system. Loan growth and credit creation are rather mediocre despite record low rates and loose lending conditions. The money created by the Fed and the ECB is finding increasingly its way back to the central bank by being deposited there. These are strong indications that quantitative policy measures are currently pointless. Further, unintended consequences of providing too much