Economy Forward

  Pandemic Monetary Policy At the onset of the Coronavirus pandemic at the beginning of 2020, central banks led by the Federal Reserve (Fed), Bank of England (BOE) and European Central Bank (ECB) started flooding the economies with money (historic loosened monetary policy) to bailout the credit systems shattered by the pandemic. This monetary policy consisted of two main instruments, i.e., keeping interest rates around zero and printing money lavishly through the purchase of government and private securities from the market. In addition, it relaxed regulations on bank lending to facilitate deferment of repayment of loans by borrowers caught in the pandemic and expansion of credit to businesses and households to survive the pandemic. This pandemic monetary policy primarily helped governments to fund their historic public stimulus programs at close to zero interest rates for the recovery of businesses and households from the pandemic. There is no controversy over this direct and fast

  R ising inflationary pressures in the US since the 3 rd quarter of 2021 have caused speculative market dealers to gamble on the future path of the monetary policy. In general, markets expect the central bank to tighten the monetary policy primarily through raising its interest rates (or policy rates) to address concerns over rising inflation in line with standard monetary textbooks. The past monetary policies show that such tightening is not an overnight act but a phase-wise lukewarm act or a nimble that spans for several years by taking into considerations of the response of the economy as reflected in incoming data with various time lags. In general, markets price inflationary pressures in financial products by adding an inflation risk premium to market interest rates or rates of returns. Therefore, even without central bank monetary policy actions, market interest rates move in parallel to inflation expectations that are partly influenced by the present inflation trend too. Treas