Semester-End Policy Liquidity Can’t Be Crammed For

Rick Rieder and Russ Brownback argue that while cramming for finals may have worked in college, it won’t with the winding down of the global central bank policy liquidity “semester.”

With autumn well underway, who doesn’t feel a nostalgic pining for the good old days of collegiate life? Crisp colorful afternoons, football games, fall festivals and, oh yeah, looming final exams and papers. For us there were one or two occasions where despite plenty of forewarning about the necessary rigor required for finals, we waited until the last minute to even begin the process. Sleepless, and caffeine-fueled, nights in the library, complete with ongoing panic attacks and sharply decreased odds of maximizing our GPA were the unsatisfactory result. On those few occasions, at best we endeavored to survive with a “gentleman’s C”. At worst? Well, let’s not even think about that.

With the benefit of hindsight it is glaringly obvious that delayed preparation was a dubious choice, with very little upside and the ultimate downside. Eventually, we learned to layer in the protection that proper preparation afforded. We find this a useful (if painful) recollection to put to use today: The “semester” of G3 (the Federal Reserve, European Central Bank and Bank of Japan) policy liquidity is winding down, and we are not waiting until the last minute to prepare.

The coming months will likely usher in the first-ever contemporaneous draining of G3 policy liquidity, but we feel increasingly comfortable with the notion that an acceleration of real economy, growth-driven liquidity can provide a very timely substitute (see graph below). While there is no doubt that this regime change comes with a wider range of uncertainty relative to recent quarters, we are confident that expected monetary tightening will be well advertised and deliberate. Moreover, we are convinced that early stage acceleration of real economy velocity will ultimately take over from policy liquidity to facilitate more traditional credit growth through channels such as commercial and industrial loans, consumer credit, and real estate lending.

G3 Central Bank Policy Liquidity Set to Slowly Decline, But Growth-Driven Sources May Fill That Gap


We are highly impressed with the depth and breadth of the current global growth paradigm, and we’re certain that it’s this momentum that has given G3 policymakers the requisite confidence to begin to address the easy financial conditions that have been such a dominant theme during 2017. To be sure, global policy liquidity has played the lead role in pushing asset prices to new highs, with strong correlations across both risk-free and risky assets.