Why are financial conditions so benign?

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  • Financial conditions have eased to the same levels as 2007
  • This comes in spite of central banks thinking they are running restrictive policy
  • The nature and timing of the market moves suggest these not so much reflect or anticipate the strength of the economy as drive it
  • Their ultimate cause is easy balance sheet policy having crowded investors into risk
  • Misunderstanding of these dynamics increases the likelihood of bubbles and subsequent busts

Global QT: what central banks haven’t learned – public copy

fed reserves vs equities 6m chg
  • The latest central bank research on QT is careful, rigorous, and grounded in the literature
  • Unfortunately its main conclusion – that QE affects markets while QT doesn’t – is at odds with the lived experience of most market participants
  • There is a much simpler reason why QT has had so little apparent impact
  • Misunderstanding of this dynamic greatly contributes to the likelihood of future policy mistakes
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