Some potentially displeasing “Sunday Start” thoughts to market bulls, from Chetan Ahya, Morgan Stanley’s global co-head of economics, who warns that in light of the recent “hawkish tilt” by central banks, the message is clear:
“…central banks are more watchful of financial stability risks: It is in this context that central banks now appear to be keen to lean against easy financial conditions so as to pre-empt the rise of financial stability risks. To assess financial stability risks, Fed Vice-Chair Fischer had recently highlighted the Fed’s framework in a recent speech in which he highlighted the “four broad cyclical vulnerabilities: (1) financial sector leverage, (2) non-financial sector borrowing, (3) liquidity and maturity transformation, and (4) asset valuation pressures”.”
As a result, “financial stability risks will hold the key: In the 2004-07 episode, as inflation was well-behaved, the pace of monetary tightening by central banks was slower than warranted, which resulted in a build-up of financial stability risks as financial conditions stayed easy, private sector leverage in both the non-financial and financial sector rose sharply and asset markets were buoyant.”
All of which means that “markets will therefore have to deal with the repricing of the central bank put – a key feature of the post-crisis world: Whether policy-makers are tightening via rates or balance sheet actions, or imposing more macro-prudential norms, the message is clear – the global monetary policy stance has taken a hawkish turn and will continue to do so.”
His full note below:
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