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The Easy Money Contagion

JACKSON HOLE, WYOMING – To consider the actions taken by the world’s major central banks in the past month is to invite an essential question: when – and where – will all this monetary easing end?

At the end of July, the Bank of Japan announced that it would maintain its current negative interest rates and bond-buying program. At the same time, the BOJ pledged that it would nearly double its annual purchases of equity-traded funds, from ¥3.3 trillion ($32.9 billion) to ¥6 trillion. And yet the announcement of a monetary-policy package that in a different era would have been considered inconceivably accommodative, actually disappointed financial markets. To the chagrin of Japanese policymakers, the yen strengthened against major currencies.

Then, in early August, the Bank of England cut borrowing costs, boosted its quantitative easing (QE), and committed an extra £100 billion ($131 billion) to encourage banks to lend. Responding to the pound’s significant depreciation against the US dollar and other currencies following the United Kingdom’s vote in June to leave the European Union, the BoE indicated the move was a pre-emptive effort to mitigate the recessionary pull of Brexit. In response to the new monetary stimulus, the London stock market surged and the UK pound slid further.

In the same week, the Reserve Bank of Australia cut its benchmark interest rate to a record-low 1.5%. The minutes of that meeting suggest that the cut was primarily aimed at heading off currency appreciation in anticipation of further interest-rate cuts and QE around the world. Members cited a “reasonable likelihood of further stimulus by a number of the major central banks.”