With the release of the minutes of the Federal Reserve's July monetary policy meeting, market expectations for a change in the Fed's accommodative monetary policy were further strengthened. Given the Fed's position among the world's central banks, a change in global monetary policy is likely to happen. However, new outbreaks caused by the Delta variant have cast a dark shadow over the prospects for the global economic recovery and brought more uncertainties to the changing global monetary environment dominated by the U.S. dollar. This not only exacerbates the current gap between developed and emerging market monetary policies, but will also further increase the uneven global recovery.
According to researchers at ANBOUND, it is still difficult to judge the current trend of global monetary policy. Within longer-term, the trend of global monetary policy shift is forming, and the changes in inflation and the outbreak will be the key factors influencing monetary policy. In addition, the factors of economic growth also play an important role in monetary policy. That means the trend still faces numerous uncertainties.
For now, inflation remains the main factor influencing the central bank's decisions. The central banks of emerging market countries, in fact, have begun to respond to inflation. Central banks in Brazil, Chile, Mexico, and other countries have begun the process of raising interest rates in response to rising inflation. Since the beginning of this year, China has gradually withdrawn its stimulus policies and started to "normalize" its monetary policy due to effective pandemic prevention and control and different economic recovery cycles. Central banks in developed countries have shown a trend of divergence in the pace of monetary policy adjustment. The Bank of Canada has begun to tighten monetary policy while the Bank of England has also reduced its bond purchases. The Reserve Bank of Australia (RBA) on the other hand, will start to taper its quantitative easing (QE) program despite keeping interest rates unchanged. Meanwhile, the United States, beset by inflation, is hesitant to scale back QE.
While the higher level of global inflation is now a reality, central banks remain divided about their future trend. With inflation remaining high, the divisions within the Fed have shifted to whether inflation is expected to be temporary or long-term, and when to start tapering. The minutes of the Fed's monetary policy meeting revealed that the debate over when to end the emergency program it implemented during the pandemic and the extent to which officials are worried about soaring inflation was more intense than the policy decisions let on. The personal consumption expenditures (PCE) price index, the Fed's inflation gauge of concern, which excludes volatile food and energy prices, rose 3.5% in June from a year earlier, the highest in 30 years. That said, the gap between employment and inflation makes it difficult for the Fed to make a decision to change policy.
Another uncertainty weighing on the central bank's decision-making is the continuing impact of COVID-19. Central banks in Europe and Japan are also taking a wait-and-see approach to monetary policy in the face of a modest rise in inflation, largely depending on the development and impact of the pandemic. More significantly, the Reserve Bank of New Zealand (RBNZ) decided to keep rates unchanged despite widespread expectations that New Zealand could be the first developed economy to raise rates as inflation hitting a 10-year record of 3.3%. The main factor contributing to this was the emergence of new cases of Delta variant in New Zealand, which led the country to declare a state of emergency to prevent the spread of the outbreak. In a sense, the seven new cases of COVID-19 in New Zealand have not only changed the country's monetary policy and its prospects of economic development, but also brought a warning to the world that the COVID-19 pandemic is still an important factor influencing the monetary policy of central banks. As indicated in the minutes of the Fed meeting, the Fed believes that the spread of the Delta variant is likely to delay a full economic restart for now. Most Fed officials noted at the meeting that the spread of the Delta variant could curb employment and labor supply. Some officials saw a risk of renewed downward price pressures and some officials were concerned that the rush to scale back QE could fall short of promises to fully restore the job market. In this sense, the pandemic remains a concern for the Fed and a major factor in its hesitation.
In theory, the setting of monetary policy goals mainly considers the stability of currency value and should insist on maintaining relative independence with economic growth. Major central banks such as the Fed have long claimed to maintain the independence of their monetary policy. However, in the wake of the COVID-19 pandemic, most of the major economies have adopted expansionary fiscal and monetary policies, deepening the integration of fiscal and monetary policies. There are also more and more discussions about economic recovery and growth under the deepening influence of the MMT framework. The Fed even introduced a new policy framework with a new average inflation target, reflecting the fact that economic growth has become the underlying target of central bank monetary policy around the world. The uneven economic recovery brought about by the pandemic is the main factor behind the unsynchronized monetary policies of central banks around the world. Changes in economic demand as a result of the pandemic and its disruption to global supply chains have added to the uncertainty about inflation and the economic outlook.
Final analysis conclusion:
The current changes in inflation and the spread of COVID-19 are the main factors influencing central banks' monetary policies, reflecting concerns about economic recovery and growth. The uneven global economic recovery has led to the desynchronization of global monetary policies, which has also increased the uncertainties about the prospects of economic recovery.
