Thursday, October 06, 2016

Down The Monetary Policy Rabbit Hole
"In the world of uncharted monetary policy, Japan has become the leader in exotic policies. They’re further along the easing curve than anyone else and represent a live case study on the limits of central bank intervention .. Over the last few years, Japan’s policy could be characterized as 'easing at all costs.' Lower interest rates were deemed the harbinger of aggregate demand, and lower was considered better across the entire yield curve. That’s now changed, as a result of learnings from past experiments .. Enter the next evolution in central bank control: long-term rate targeting .. The new policy of targeting a 0% rate on the 10-year bond is designed to steepen the yield curve, thereby providing an incentive for banks to lend .. The BOJ’s other notable change has to do with their targets for inflation. Scrapping their timetable for bringing inflation back to the 2% target, the BOJ is now aiming to 'overshoot' that target as soon as possible. This notion of overshooting inflation has begun to creep up more frequently in central bank comments across the globe. Even some Fed officials have referenced this idea. The underlying objective seems clear, but is also worrisome .. Inflation allows an economy to reduce the penalty of previous debt, freeing up funds for future consumption. This 'engine' of consumption could play a very important role in the future, if and when we finally see the whites of inflation’s eyes."
- Matthew Kerkhoff, Dow Theory Letters
LINK HERE to the essay

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