US Monetary Policy: Care Is Needed with the Pandemic Exit Strategy

The U.S. Federal Reserve Board has signaled that it will lift the de facto zero interest rate policy, which had been projected to last until 2024 or later, as early as 2023. It said it would also begin a thorough review of whether to scale back its quantitative-easing measures that allow for the purchase of national debt.

It has been said that this is the first step toward an exit from the large-scale monetary easing implemented in response to the COVID-19 pandemic.

The U.S. economy is recovering rapidly due to a large fiscal stimulus and progress with vaccinations, with price increases also accelerating. Gross domestic product has returned to around the same level it was pre-pandemic, and due to the inflow of funds, prices of assets such as stocks and real estate are rising.

It is clear that by increasing interest rates earlier, the FRB’s aim is to avoid economic overheating and asset bubbles.

After the FRB’s announcement, stock prices plummeted in the U.S., Japan and elsewhere. In controlling the key currency of the dollar, the FRB and its actions have a profound impact on the economies and monetary policies of countries around the world. For example, news in 2013 that indicated the FRB would curtail quantitative easing resulted in the deprecation of currencies in developing countries.

It is essential that the FRB take a holistic approach, by engaging in dialogue with markets and so on, so that its decisions do not spark instability in the global economy.

The FRB has been cooperating with major central banks with the aim of supporting economic stability, bringing back zero interest rates and restarting quantitative easing as a result of the pandemic.

Unlike previous economic crises, such as the 2008 financial crash, monetary policy alone is ineffective. However, in a global economy where funds can cross borders in an instant, a unified response has resulted in a degree of effectiveness.

What is of concern is that there are differences in the state of each country’s vaccination progress and economic recovery, meaning that discrepancies are starting to appear in the direction of monetary policies.

Canada has decided to reduce its quantitative easing, with New Zealand and other countries likely to raise interest rates ahead of the United States.

Meanwhile, the economies of emerging and developing countries that have fallen behind in securing vaccines are stagnating.

The European Central Bank, which implemented negative interest rates, has not changed its stance on maintaining easing.

If this situation continues, it could destabilize the flow of funds as well as interest rates.

A substantial outflow of funds from emerging countries could further damage economies struggling as a result of the COVID-19 pandemic.

It is necessary for each nation’s financial authorities to cooperate, share information and monitor the situation.

The Bank of Japan is one of many that is particularly far off any exit strategy, choosing last week to maintain current easing measures. It has introduced stopgap measures to mitigate the side effects of eight years of large-scale easing, which have left bank profits deteriorating and market function declining, though it is clear that the situation has reached an impasse.

The Japanese government’s response to the pandemic continues to lag behind and delay economic recovery, making it impossible to revise monetary policy. Even so, the government should focus on a time beyond the pandemic and begin to discuss an exit strategy.