Can Central Banks Really Keep Interest Rates Down? – Daily Bell

Can Central Banks Really Keep Interest Rates Down? – Daily Bell

Ben Bernanke, Mario Draghi and Shinzo Abe are the modern-day heroes. They will not allow for anything bad to happen. Their restless devotion to stability and prosperity will ensure that the world finds its way back to fortunes on that painless path of monetary expansion. A sweet feeling of safety and tranquility comes over us when we think of our central bankers. Long live the Keynesian solution!
A few possibly naive, but nevertheless important, questions need to be posed here: First of all, what impact has monetary expansion had so far? Secondly, while inflation and interest rates appear to remain low, can we really expect central banks to fully control that situation?
Last week, Ben Bernanke merely broached the possibility of the Fed's reducing measures of quantitative easing (QE3) and monetary stimulus "if economic conditions continue to improve". Almost instantly, large parts of the market considered that threat enough to sell. After the Nikkei lost more than 7% within one day of trading, other markets around the world followed suit and corrected, albeit at much lower levels. It appears that many investors actually and truthfully believe economic conditions – like the real, fundamental economy – will indeed "continue to improve."
I have my doubts. And, while our client portfolios continue to be invested in the stock markets, our risk management is in high gear. As the global equity and bond markets grind ever higher, abundant indications exist that we have once again entered bubble territory. This makes this period quite interesting but also quite dangerous.
A sustainable recovery based on QE?
So far, the QE programs in America, Europe and Japan have had substantial spillover effects in financial markets. In particular, the Fed's policies have reduced global bond yields, raised global equities and led to US dollar depreciation. However, they have had little positive impact on the real economy.