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Overseas Stimulus Train Keeps Hurtling Forward

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As we focus on the most recent moves of the Federal Reserve, it’s easy to miss the bigger picture. The Fed has been trying to move toward an interest rate “normalization” program for more than a year, since nudging rates up .25 points in Dec. 2015.

Although it remains to be seen whether the two interest rate hikes last December and March signal a rocket launch or a sputtering firecracker, the central bank at least wants to give the appearance of tightening. The Fed has also launched some trial balloons with talk of shrinking its bloated balance sheet.

But some other central banks around the world aren’t even making a pretense of “normalization.” For instance, Bank of Japan Governor Haruhiko Kuroda said Monday the central bank remains committed to maintaining its massive monetary stimulus program.

Last fall, the BOJ launched a program to hold short-term interest rates in negative territory at minus 0.1%. The bank also seeks to keep the Japanese 10-year bond yield at about 0% through aggressive asset purchases.

Kuroda’s comments echoed statements he made in March. Japanese central planners remain obsessed with hitting the 2% target inflation rate, as Kuroda stated at a Reuters Newsmaker event last month:

“There is no reason to reduce the level of monetary accommodation in light of current economic and price developments. I don’t think we need to raise our interest-rate targets now. It’s unclear whether inflation will hit our 2% target before my term ends next April.”

Meanwhile in Europe, EU Central Bank chief Mario Draghi insisted last week stimulus was still necessary in the 19-country eurozone, despite signs of strengthening in the economy.

“The recovery is progressing and now may be gaining momentum,” Draghi said in a speech at a conference at Frankfurt’s Goethe University, according to an AP report. But despite the optimism, Draghi cautioned that much of the improvement depended on the ECB’s monetary stimulus efforts and that it was “too soon to declare success.”

According to the AP, the stimulus will likely remain in place at least through the end of 2017.

“The ECB has said it intends to continue its main stimulus program — which pushes newly printed money into the eurozone economy through bond purchases — at least through the end of the year. It has also kept its key interest rate benchmark at a record low of zero. Both steps aim to raise inflation and increase credit to businesses so they can expand and hire people.”

Draghi wrote an account of the ECB’s March meeting and indicated the bank’s 25-member rate-setting committee remained in “broad agreement” that “a very substantial degree” of stimulus was still necessary.

One has to wonder whether the Federal Reserve will be able to maintain any kind of long-term tightening of its nearly decade long stimulus policy when the rest of the world remains hopelessly addicted to easy central bank money. While the Fed may want to give the appearance of throwing on the brakes, it appears much of the world remains intent on hurtling full-speed ahead with monetary stimulus and aggressive economic intervention.

This underscores the importance of keeping an eye on the big picture. The US economy and the Fed don’t operate in a vacuum. Despite tentative moves to kick the easy money habit in America, the rest of the world shows little sign of turning away from its drug of choice. And we all know what happens when a recovering addict doesn’t change the company it keeps.


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