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Fed/BoE: Better too late than too early? - Nomura

FXStreet (Bali) - Richard Koo, chief economist at Nomura Research Institute. shares his personal view as to why BoE and Fed should be prudent about the timing of the first rate hike.

Key Quotes

"I suspect one reason why both the BOE and the Fed are hesitant to adjust monetary policy in spite of sharp recent improvements in the unemployment rate lies in the past experiences of the BOJ and the ECB."

"The BOJ’s decision during the IT bubble in 2000 to raise the policy rate from zero to 0.25% was heavily criticized by monetary policy “true believers” in both Japan and the West as having prolonged the recession. The ECB, too, raised rates in 2010 but has since been forced by weakness in the real economy to take interest rates down to, and now below, zero."

"These examples suggest the BOE and the Fed may be of the view that being too late is better than being too early when it comes to tightening monetary policy."

"The aforementioned decisions by the BOJ and ECB, however, were made at a time when neither bank was engaged in quantitative easing. Today’s environment is very different, with the Fed, the BOE, and the BOJ all having undertaken extensive QE programs."

"I think the markets—and particularly the long-term bond markets—could crash if the monetary authorities are perceived as falling behind the curve on inflation at a time when there are already massive excess reserves in the banking system."

"If central banks in the UK, the US, and Japan focus excessively on the earlier tightening decisions of the BOJ and ECB—which in retrospect were probably too early—and end up waiting too long to tighten, they could cause tremendous damage in the long-term bond markets."

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