When Central Banks Lose Control


When does monetary policy work best? When every central bank is pulling in the same direction … policy actions are fairly plain-vanilla … and investors act as if policymakers are in firm control.

When does it start to fall apart? In environments like this one, when the exact opposite is true! euro central bank

Just think about it.The European Central Bank recently launched one of the most aggressive policy efforts ever.

It lowered its benchmark deposit rate to negative-0.4% from negative-0.3% … expanded “Euro-QE” to 80 billion euros per month from 60 billion … added investment grade corporate bonds to the list of assets it can buy … and launched four so-called targeted longer-term refinancing operations or “TLTROs” designed to incentivize banks to lend.

That’s not conventional. It’s mad monetary experimentation, the likes of which we never could have imagined a few years ago.

bank of japanIn Asia, the Bank of Japan recently ventured into the world of negative interest rate policy (or “NIRP”). That helped push the yield on its 10-year Treasury note into negative territory, the first time that’s ever happened for a major world economy’s 10-year securities.

One stated goal of the BOJ’s efforts was to cheapen the Japanese yen currency.

But after falling for all of a few hours, it reversed course and shot higher — to the highest level in more than a year.

Here in the U.S., the Federal Reserve stopped doing QE a long time ago. Then it started raising short-term interest rates in December. A few days ago, it also strongly hinted at future, additional hikes later in 2016.QE

Do you see what I’m getting at? We have major central banks pulling in every different direction. We have rampant experimentation with untested policy actions around the world. And we have markets moving in the exact opposite directions that policymakers want them to move.

This isn’t a recipe for market stability.

It’s a recipe for an explosion in volatility. It’s also why safety and security should be your primary goals right now, especially when you consider we’re in the late-cycle phase of the economy and credit cycle.

You can learn more about policy actions, economic cycles, and the appropriate investments for each market phase in my educational course, How To Profit From Rising Interest Rates”  I think you’ll find the guidance in the course very helpful, given the increasing policy-induced volatility we’re seeing everywhere.

Until next time,

Mike Larson

Mike Larson is a Senior Analyst for Weiss Research, and is also the editor of Safe Money Report and Interest Rate Speculator at Weiss. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.