RIGA, Latvia -- Two of the globe's most powerful central banks are gradually withdrawing the easy-money policies that helped repair the damage wrought by the 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 find 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 European Central Bank said Thursday that 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 on Wednesday raised interest rates for the second time this year, reversing rate cuts it started making almost 10 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 European Central Bank'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 central bank wants inflation at just under 2 percent, and the last figures show it at 1.9 percent -- technically in line with the goal, but it must also be sure inflation will stay high when stimulus is removed.
The central bank's 25-member governing council said Thursday that the bond purchases would be cut to $17.7 billion a month in October, from the current $35 billion. 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 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 European Central Bank 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 also could increase returns for savers and make it easier for pension savings to grow.
The central bank'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. Central bank 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 European 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. U.S. 10-year Treasury notes 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 also have 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.
The stimulus on both ends was unprecedented in size. The Fed purchased some $3.6 trillion in bonds, while the European Central Bank will have loaded $3.1 trillion worth 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 like stocks and bonds. The Dow and Germany's DAX both touched record highs earlier this year.
Business on 06/15/2018
Print Headline: EU, U.S. phasing out easy money