Is it different this time?
City Index September 18, 2012 10:22 PM
<p>So much has happened since the collapse of Lehman Brothers this week four years ago. Three rounds of quantitative easing from the US Fed, four […]</p>
So much has happened since the collapse of Lehman Brothers this week four years ago. Three rounds of quantitative easing from the US Fed, four rounds of QE from the Bank of England, five bailouts from the eurozone, two waves of bond purchase programmes and two rounds of Long Term Refinancing Operations from the ECB.
Result: G7 policy rates are at or near zero and equity markets are 5% – 10% away from their record highs. Yet, as eventful as the four years have proven, the first two weeks of September 2012 rank high in relevance and lack of precedence.
Draghi & Bernanke: How Different?
Draghi’s Outright Market Transaction programme stands out from prior bond purchase plans via its ability to combine conditionality, sterilisation and unlimited purchases. Most of all, the OMT has integrated monetary policy into fiscal policy, i.e. requiring nations to abide by fiscal rules in order for their bonds to receive monetary stimulus.
Draghi’s OMT may not be a direct solution to Europe’s high debt/low growth problem, but it buys invaluable time for national governments to pursue their austerity policies by keeping yields in check and markets supported.
As for the Fed’s QE3, it stands out from previous programmes in its open-ended nature to target the labour market and its willingness to see higher inflation surpassing 2% with the aim of reducing unemployment below the stubborn 8% figure.
Another remarkable attribute to the Draghi/Bernanke policy combo is that rarely have the markets rallied ahead of anticipated policy measures and continued to do so after their materialisation. And so it happened; Draghi vows to spend unlimited amounts to drag down bond yields and Bernanke is willing to extend monthly purchases indefinitely – until unemployment declines and remains below 7%.
Such unprecedented policy-making could be just what the doctor ordered for equity bulls to revisit their 2007 record levels and metals to regain last year’s highs.
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