For years, financial markets benefited enormously from the generosity of monetary policy in a world economy deemed by central banks, and the US Federal Reserve in particular, to lack sufficient aggregate demand.
To the detriment of markets, this has been changing rapidly as central banks belatedly recognise that today’s problem is not one of weak demand but, rather, insufficient supply. Looking forward, an even more complicated possibility is taking shape: that of stalling demand in the midst of persistent supply disruptions.
Central banks felt compelled to maintain ultra-loose monetary policy in a world of muted economic growth and deflation risks. The Fed went further and, in August 2020, shifted to a new monetary framework that postponed the usual policy response to inflation nearing and exceeding the Fed’s 2 per cent target.