Europe, Fed moves show global shift away from cheap money - WTVM.com-Columbus, GA News Weather & Sports

Europe, Fed moves show global shift away from cheap money

(AP Photo/Mindaugas Kulbis, File). FILE - In this Thursday, Jan. 1, 2015 file photo, euro coins and banknotes are shown by a salesclerk at a shop in Vilnius, Lithuania. Italy's economy minister says the new populist government isn't discussing any prop... (AP Photo/Mindaugas Kulbis, File). FILE - In this Thursday, Jan. 1, 2015 file photo, euro coins and banknotes are shown by a salesclerk at a shop in Vilnius, Lithuania. Italy's economy minister says the new populist government isn't discussing any prop...

By DAVID McHUGH
AP Business Writer

RIGA, Latvia (AP) - Two of the globe's most powerful central banks are gradually withdrawing the easy money policies that helped repair the damage wrought by the Great Recession and push stock markets to record highs. It's a sign of confidence in the economy, but with uncertain consequences for consumers and businesses.

As growth picks up in the U.S. and Europe and more people finding jobs, the European Central Bank and the U.S. Federal Reserve are deeming it unnecessary to support the economy with policies created in darker days of financial uncertainty.

The ECB on Thursday said it would phase out by the end of this year its bond-buying stimulus for the 19 countries that use the euro. It had deployed the program in 2015 to save the region from the risk of falling prices and growth, and as Greece's debt crisis raised questions about the euro's future.

The move came less than a day after the U.S. Federal Reserve raised interest rates for the second time this year on Wednesday, reversing rate cuts it started making almost ten years ago during the financial crisis.

"We are in an altogether different world to only a couple of years ago," said Patrick O'Donnell, senior investments manager at Aberdeen Standard Investments.

The central bank moves, he said, are "another step on the way to removing the extraordinary global monetary stimulus over the last decade."

The ECB's bond purchases were a way of pushing newly created money into the economy. That sought to lower borrowing rates and improve growth and inflation. The ECB wants inflation at just under 2 percent, and the last figures show it at 1.9 percent - technically in line with the goal, but the ECB must also be sure inflation will stay high when stimulus is removed.

The ECB's 25-member governing council said Thursday that the bond purchases would be cut to 15 billion euros ($17.7 billion) a month in October, from the current 30 billion euros. The purchases would then be wound up completely after December.

The bank was careful to stress that it would withdraw support for the economy only gradually, saying its key interest rate would not rise from its record low of zero until at least the summer of 2019.

That means it will be years before monetary policy and interest rates return to more historically normal levels. The goal: avoid a sharp rise in market rates like one that occurred in 2013 when then-Fed chief Ben Bernanke mentioned withdrawing stimulus.

However gradual, the exit is nonetheless a milestone for the eurozone economy, which recovered more slowly from the Great Recession than the U.S. Unemployment in the U.S. is 3.8 percent, less than half the eurozone's 8.5 percent.

Both the ECB and Fed moves will allow market borrowing rates to rise gradually. That could make loans somewhat more expensive for homebuyers and companies looking to invest. But it could also increase returns for savers and make it easier for pension savings to grow.

The ECB's effort in recent years to drop those borrowing rates has had its critics in some parts of Europe, especially Germany, who said it harmed savers and reduced the incentive for indebted governments to repair their finances by lowering borrowing costs. ECB President Mario Draghi says the bank's policy of easy money has helped create millions of new jobs, with unemployment falling from over 12 percent during the crisis.

There's little doubt, however, that the ECB stimulus program has helped heavily indebted countries like Italy borrow at unusually cheap rates. Its 10-year bonds yield only 2.76 percent despite sluggish growth and a government whose officials have in the past speculated about leaving the euro. US. 10-year Treasurys yield 2.95 percent.

Italy is in focus in Europe at the moment after a populist government came to power. A coalition between the anti-establishment 5-Star Movement and the anti-immigration League has promised spending that could add to the country's already heavy debt load. At various times the parties have also questioned Italy's membership in the euro, though the finance minister this week calmed markets by saying the country has no intention to leave.

The Fed has already ended its own bond-buying program, which had similar goals, and has made seven interest rate increases to the current policy rate of 1.75-2.0 percent. At that, the Fed is also moving gradually; with core inflation at 2.2 percent in May, and headline inflation at 2.8 percent, the U.S. central bank benchmark is only around zero in real terms, when inflation is taken into consideration.

The stimulus on both ends was unprecedented in size. The Fed purchased some $3.6 trillion in bonds, while the ECB will have loaded 2.6 trillion euros ($3.1 trillion) of bonds on its balance sheet, in both cases a measure of the total size of the banks' stimulus efforts. All that money flooding into the financial system through banks pushed up the prices of investments likes stocks and bonds. The Dow and Germany's DAX both touched record highs earlier this year.

As the stimulus is ended and then withdrawn over a period of years, those effects will go into reverse, though investors do not seem too worried just yet: the DAX rallied 1.7 percent on Thursday.

Copyright 2018 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

  • NationalMore>>

  • Fans grieve as detectives search for XXXTentacion's killers

    Fans grieve as detectives search for XXXTentacion's killers

    Tuesday, June 19 2018 11:31 PM EDT2018-06-20 03:31:32 GMT
    Wednesday, June 20 2018 3:26 AM EDT2018-06-20 07:26:34 GMT
    (AP Photo/Terry Spencer). Fans and mourners of rap singer XXXTentacion pause by a memorial, Tuesday, June 19, 2018, outside Riva Motorsports in Deerfield Beach, Fla., where the troubled rapper-singer was killed the day before. The 20-year-old rising st...(AP Photo/Terry Spencer). Fans and mourners of rap singer XXXTentacion pause by a memorial, Tuesday, June 19, 2018, outside Riva Motorsports in Deerfield Beach, Fla., where the troubled rapper-singer was killed the day before. The 20-year-old rising st...
    A stream of mourners has been leaving mementos at the spot where rapper XXXTentacion was killed as he left a Florida motorcycle dealership.More >>
    A stream of mourners has been leaving mementos at the spot where rapper XXXTentacion was killed as he left a Florida motorcycle dealership.More >>
  • Chicago teen to be sentenced in 2014 Facebook feud slaying

    Chicago teen to be sentenced in 2014 Facebook feud slaying

    Wednesday, June 20 2018 12:51 AM EDT2018-06-20 04:51:06 GMT
    Wednesday, June 20 2018 3:26 AM EDT2018-06-20 07:26:27 GMT
    (Jessica Koscielniak/Chicago Sun-Times via AP). In this May 5, 2014 photo, the casket of Endia Martin is carried by pallbearers following funeral services for 14-year-old at St. Andrew Temple Baptist Church in Chicago. Martin was killed by another 14-y...(Jessica Koscielniak/Chicago Sun-Times via AP). In this May 5, 2014 photo, the casket of Endia Martin is carried by pallbearers following funeral services for 14-year-old at St. Andrew Temple Baptist Church in Chicago. Martin was killed by another 14-y...
    Chicago teenager set to be sentenced for killing another girl during a 2014 street fight that started as a Facebook feud over a boy.More >>
    Chicago teenager set to be sentenced for killing another girl during a 2014 street fight that started as a Facebook feud over a boy.More >>
  • Hearing set for California parents accused of shackling kids

    Hearing set for California parents accused of shackling kids

    Wednesday, June 20 2018 2:41 AM EDT2018-06-20 06:41:05 GMT
    Wednesday, June 20 2018 3:26 AM EDT2018-06-20 07:26:22 GMT
    (Watchara Phomicinda/The Press-Enterprise via AP, Pool). FILE - In this May 4, 2018, file photo, defendant Louise Anna Turpin, second left, talks with an investigator as her husband David Allen Turpin, right, looks on during a court appearance in River...(Watchara Phomicinda/The Press-Enterprise via AP, Pool). FILE - In this May 4, 2018, file photo, defendant Louise Anna Turpin, second left, talks with an investigator as her husband David Allen Turpin, right, looks on during a court appearance in River...
    Prosecutors are expected to make their case against a Southern California couple accused of starving and shackling some of their 13 children.More >>
    Prosecutors are expected to make their case against a Southern California couple accused of starving and shackling some of their 13 children.More >>
Powered by Frankly