With the ongoing synchronized pick-up in global growth, systemically important central banks will likely be more willing and able in 2018 to start and, in one case continue, the normalization of monetary policy. But what is true for the central banking community as a whole is more nuanced when assessed at the level of individual institutions. Here is the outlook in ascending degrees of policy difficulty and, therefore, of the risks of policy mistakes.
The U.S. Federal Reserve is the most advanced in the policy-normalization process. It has stopped its unconventional program of security purchases, hiked rates four times and set out a plan for the gradual reduction of its balance sheet.
The Fed will likely enter 2018 with another hike under its belt and a bigger window to normalize owing to the tax measures making their way through Congress. As such, markets may need to revise upward their implicit pricing of Fed actions to be more consistent with the projection of two to three additional rate increases next year. And, within the context of the ongoing “beautiful normalization,” such revisions won’t necessarily need to be disruptive to either financial stability or economic growth.continue reading »