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Fed Watch closed the year with a whirlwind revision of the central bank’s monetary policy in 2020. There are many experts who talk about the results of the central bank’s action, but never look at what central banks are actually doing. This episode of “Fed Watch” started with the data and started to understand where macro goes, and finally how bitcoin fits into it.
In this episode, Christian Keroles and I walked through my last article outlining all the policy changes that came in 2020 from the Federal Reserve, the European Central Bank (ECB) and the Bank of Japan (BOJ). Central banks have intervened more this year than ever before, in both depth and breadth. However, the taste of intervention was largely the same, only greater.
In 2020, another financial crisis was set to occur, even before the government’s devastating response to the virus. The global economy has slowed since 2018 and signs of a growing crisis have been evident since the repo market troubles in September 2019. The Fed entered 2020 with a repo facility for emergency lending and interest rate cuts, while the ECB and BOJ were both active. engaged in quantitative easing (QE).
The heart of the crisis started in the week of March 15, 2020 when the Fed announced its QE package. Within four days, trillions of dollars in central bank liquidity was unleashed in a shock and awe strategy from the three largest banks we discussed. The central banks’ scripts were essentially the same as during the Great Financial Crisis (GFC) in 2008: they doubled when they appeared “credibly irresponsible. “Their goal is to pull the market out of contraction in an expansive / inflationary mindset. Their tool to achieve that is to threaten the market with high inflation.
QE involves the practice of central banks buying securities from large institutions in an attempt to strengthen their balance sheets and get them to borrow. It was used again by all three major central banks. The innovative central bank is the BOJ. If you want to know what central banks are going to do next and what the results will be, just look at the BOJ, it’s 10 years ahead of the ECB and the Fed. For example, this year the Fed expanded its policy to buy corporate paper and debt, as did the BOJ a few years ago QQE.
The only unique weapon the Fed has is currency swap lines, and they were used this year. Everyone needs the dollar for international affairs, especially in times of crisis. This time, the Fed provided $ 400 billion in currency swap loans to foreign central banks. Of course, loans have to be paid back in principle and interest, so a small shortage of dollars is built into each loan, sowing the seeds for the next crisis.
The episode ended with our hosts’ takeaways from the data and thoughts on the future direction of the international monetary order.