For now, the policy remains a tailspin

When it became clear in early 2020 that the Kovid-1 pandemic epidemic was set to bolster the global economy, central banks acted swiftly, brought interest rates close to zero and set up a program to buy hundreds of billions of dollars, euros in government and corporate bonds. , And pounds.

The global financial crisis was fresh enough in memory to convey the dangers of not acting quickly or boldly. And the shocking nature of the epidemic has promised to break away from the man-made, structural shock of the global financial crisis. The hard ground will be visible in the crisis that the epidemic will create, which gives policymakers confidence that they can bridge this gap.

Now, in the hope that the vaccines will boost immunity this year and revive economic activity, investors are beginning to wonder what will happen next. What happens when the “whatever” approach to fiscal and monetary policy finds its way to bold action?

‘We are still in the middle of the epidemic’

Investors should remind themselves that much of the world’s epidemics remain strong – both from a human and economic point of view – and the policy response will be helpful in the months ahead.

“We’re still in the middle of it,” said Josh Hart, a senior economist at Vanguard in the United States. “It may seem less like an emergency now, and we think we have a better understanding of the end point for the development of the vaccine. But the direction of the economy still depends on health outcomes.

Mr. Hart said the idea is to limit the “scars” so that adequate support is provided so that economic activity is reduced, bankruptcy does not occur and temporary job losses are not permanent.

Financial and financial support is unprecedented

Comments: Changes in fiscal policy are presented by changing the cyclically adjusted initial balance from 201 fiscal to September 0 September, 2020.
Source: Vanguard, the U.S. Congressional Budget Office, the Board of Governors of the U.S. Federal Reserve System, and the International Monetary Fund, until September 30, 2020.

The United States passed the ২ 2.2 trillion Cares Act in March 2020 and another ০০ 100,000 billion in relief package in December, and is considering more funding. The US Federal Reserve has pledged at least $ 120 billion per month in indefinite purchases of US Treasury and agency mortgage-backed securities.

The European Central Bank expanded its epidemic emergency procurement program in December to a total of 1.85 trillion (US 2.25 trillion) and extended its procurement deadline by at least March 2022. Last year to support jobs and businesses. The € 750 billion (US 9 910 billion) next-generation EU epidemic recovery program began distributing this year.

Meanwhile, China – where the epidemic originated – is widely seen for effectively controlling the virus. Its financial and financial support was modest compared to other major economies and its economy registered growth for 2020.

“Life in China returned to normal in the middle of last year,” said Alexis Gray, a senior economist at Melbourne-based Vanguard. “People were going back to the office, and restaurants and cinema halls were open. There has been an outbreak of some regionalization, but they have been squashed so far. So if you look at a national level, life is normal for the most part, which is clearly very different from what we see in the United States and Europe.

Simple monetary policy means easy orrow terms

Note: The forecast represents a nominal GDP growth of 3.5%, with average debt interest costs 1.2% and a budget deficit of 2.5%.
Source: Vanguard calculations based on data from the Refinitive and International Monetary Fund until September0, 2020.

London-based vanguard economist Sean Raitha said the combination of financial aid and favorable monetary policy was not a coincidence: “Emergency quantitative easing has helped keep finances in check. It has, in turn, allowed governments to borrow heavily in a more sustainable way.”

The prevalence of Covid-1 is still increasing, Mr. Raithatha does not predict that monetary policy will be normal for at least the next 12 months. In Europe, he said, the risks towards further accelerating the purchase of short-term quantitative facilitation amid stringent virus-control restrictions are actually skewed.

The low interest rate environment can help governments avoid prolonged recovery from the global financial crisis, especially in Europe with long-term recovery restrictions. The official orrow to finance the recovery from the epidemic is closed at today’s extreme rate, Mr. Raithatha mentioned.

“As long as the nominal GDP growth rate exceeds the nominal cost of debt and budget deficits begin to normalize from their current exceptional levels, which you would expect after the threat from Covid-1, the official debt-to-GDP ratio is likely to gradually decline over time. Will fall, ”he said.

Roger Aliaga-Diaz, Vanguard’s chief U.S. economist, explained the financial mathematics behind debt stability in his June 2020 blog.

How will investors react to inflation?

Although the fight against the epidemic remains at the forefront and at the center, future-looking investors are beginning to worry about the timing and impact of support যা what the Federal Reserve said on January 27 was premature. Here again, it has the power to provide recovery information from the global financial crisis. Known as the “taper tantrum”, the U.S. Treasury yield spread in 2013 when news broke that the Fed would cut asset purchases. This time, the Fed insists that the end of scaling behind asset purchases will be clearly signaled well.

The opposite principle of quantitative simplification is a logical first step towards normalization, for which the benchmark interest rate is the primary lever. The underlying fear of investors is that inflation could rise – and a test may be ahead. “We expect inflation in the United States to be above 2% by the middle of the year.” What does this do for investor psychology? “

Vanguard believes the push will be temporary, in part because of the base effect, or less than a year ago, and that structural forces will keep full-year U.S. inflation below the Fed’s 2% target. It should also be noted that in 2020, the Fed adopted an “average inflation target” strategy, which allows inflation to exceed its target until inflation averages 2% over time.

“There’s a risk to the portfolio,” Mr. Hart said: “A well-supported policy environment in which the defeat of the epidemic results in strong demand and ‘animal spirits’ that can affect inflationary psychology, forcing the Fed to act faster than expected is currently expected.” Can cause losses and dispel some of the arguments for higher valuations that currently support equity markets.

Vanguard does not predict such a scene this year. As we note Vanguard Economic and Market Outlook for 2021: Moving Towards Dawn, We find it unlikely that the short-term rate will increase in any large developed market because monetary policy is highly favorable. And we don’t evaluate global equities fairly or have the potential to generate external returns.

An ever-present risk for investors, meanwhile, may be to try to remove the market-when-and-possible conditions will work. That’s why we recommend that investors follow Vanguard’s principles for successful investing: set clear investment goals, ensure that portfolios in asset classes and regions are well diversified, keep investment costs low, and take a long-term outlook.


All investments are at risk, including the potential loss of money you invest.

Investing in bonds is subject to interest rates, credit and inflation risk.

Diversity does not guarantee gain or protect from loss.

Investments in stocks or bonds issued by non-US companies are subject to country / regional risks and currency risks.

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