The US Federal Reserve System (FRS) is "broken." More precisely, somebody broke it. In 2019, the myth of the independence of the American monetary authorities was finally destroyed. For some, it is a signal to receive political or economic short-term profit. For others, it is the forerunner of the grand boom.
All subsequent years after the 2008 crisis, FRS has been pursuing a policy of quantitative expansion, buying US Treasury bonds and mortgage bonds on the open market, flooding the financial system with a cheap dollar. This policy of a grand regulator caused the extra-long cycle of business growth that has lasted from 2009 to the present time. The sucker fishes have also received their bonuses from this policy in the form of economies of developing countries. This explains the relatively fast rebound of the global economy after the global financial crisis.
But since 2017, the situation began to change gradually, and the “quantitative expansion” was replaced by “quantitative contraction,” which was manifested in the steady growth of the US Federal Reserve base interest rates and liquidity withdrawal through the sale of the fed-back bond portfolio. This monetary cooling immediately struck emerging markets (for example, Argentine, Turkey, and Iran), which just hailed down. Ukraine was also hooked by it, its yield on sovereign obligations (Eurobonds) rose almost to 10% this fall. It has become more difficult for emerging economies to borrow external debt, attract investments, and develop. As a result, a sharp increase in pressure on national currencies, which was felt by hryvnia last winter, when its rapid peak was stopped by boosting the National Bank of Ukraine discount rate.
The dynamics of forecasts of the regulator regarding the maximum level of interest rates (we took the upper value of the forecast scale) speaks eloquently about how the FRS strategy has changed: if in September 2018 the rate extremum for 2019 was planned at 3.4% (3.6% for 2020), then in December this forecast narrowed to 3.1% and 3.4%, respectively. This does not change the "terrible end" scenario for developing countries. But in March 2019, the forecast fell below the cherished mark of 3% and amounted to 2.6% for 2019 and 2.9% for 2020, which is much better, and the "terrible end" is being replaced by a "horror without end."
It would not be an exaggeration to say that the policy of "quantitative compression," or the strategy of bringing the US financial system "into the banks," ended without beginning. It was planned that the FRS would sell 50 billion USD in treasury and mortgage bonds on a monthly basis. In reality, this amount was significantly lower: about 20 billion USD in treasuries and about 15 billion USD in mortgage securities. Since October 2017, when the monetary compression policy started, the FRS balance sheet was reduced from just 4.2 trillion USD to 3.9 trillion USD.
It was like everything was finally falling into place – the happiness of emerging markets: a return to the policy of a "cheap dollar." Let's just say, the era of the "unpredictable" dollar, which is not so bad for such countries as Ukraine.
Out of nowhere, there's inversion which has just appeared like a jack-in-the-box. To assess the prospects of the world economy and global financial markets, there is such a universal tool as a comparison of the yield of short-term and long-term treasuries bonds of the US Treasury. In the case when steady growth is expected, the yield of short-term Treasuries is always lower than of long-term ones. The rates on long-term instruments turned out to be lower than the short-term ones.
Instead of slowing down, seeing the concrete wall, FRS, "broken" by the White House in half, decided to have another joyride. For countries such as Ukraine, this is not only a respite but also an opportunity to finally form a coherent concept of its further development.
This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.