After The Monetary Binge: What?

The latest edition of our finance and property news digest with a distinctively Australian flavour.

In this week’s market review, consider the hangover coming as the punch bowl of cheap funds is taken away. We start as always with the US, go across Europe and Asia, and end in Australia. Why, because like it our not our fate will be largely determined by what happens in the US – which drives the price of money via the US dollar, and China, our main export partner.

The US FOMC raised interest rates in June by 75 basis points in June. And last month, the U.S. central bank also started reducing the size of its enormous balance sheet. Until September, the Fed will be cutting $45 billion a month from its massive holdings, and it will increase to $95 billion, almost twice as much as it did in the previous episode of quantitative tightening. So the value of the Fed’s assets has already peaked, reaching $8.95 trillion in mid-May 2022.

But, although the Fed is tightening its monetary policy, its stance remains accommodative. According to the Taylor rule, the federal funds rate shouldn’t be just between 1.50% and 1.75%, but at least above 5% .

So the U.S. central bank remains behind the inflation curve and would have to raise interest rates much further to combat high inflation. But in the previous Fed’s tightening cycle of 2017-2019 which led to the repo crisis, forced the U.S. central bank to reverse its stance and cut interest rates.

Given how fragile the financial system is and how much indebted the American economy is, it’s almost certain that the current monetary policy tightening will lead to a sovereign-debt crisis or another kind of financial crisis.

[CONTENT]

0:00 Start
0:15 Introduction
00:46 Removing The Punch Bowel
2:45 US Dollar
4:00 Economic Indicators
5:45 US Markets
08:00 Bonds
8:50 European Markets
10:25 Oil and Gold
12:40 Asian Markets
14:00 China Economics
15:30 China Property Bust
19:25 Australian Market
22:00 Crypto Crash
23:00 Conclusion

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