“A decade after the onset of the global financial crisis, it seems more than appropriate for central bankers to move the levers of policy off their emergency settings. A world in recovery – no matter how anemic it may be – does not require a crisis-like approach to monetary policy.”

(Stephen S. Roach, The Courage To Normalize Monetary Policy, Project Syndicate, Sept. 26, 2017)

In the wake of the severe 2008-09 economic downturn there was widespread fear that an international financial collapse was imminent, and that the ordinary policy tools (fiscal support and bail outs) would be incapable of stopping the hemorrhage.

Confidence in the financial markets had to be restored and the major central banks, led by the U.S. Fed, implemented a series of unconventional monetary policy measures. The new measures included zero interest rates, massive purchases of financial assets including private sector debt, and the introduction of formal quantitative easing (QE) policies.

The large central banks (the Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan) all quickly lowered their interest rates to zero which also resulted in massive balance sheet expansions.

Now the major central banks are starting to normalize conditions, or at least plan to start the normalization process,

The US Fed has already raised interest rates twice and has scheduled a slow process of shrinking its balance sheet.

The Bank of England and the European Central Bank (ECB) are both hinting at this new direction.

The Bank of Canada has also begun to tighten monetary policy, and has raised its policy rates 50 basis points over the last couple of months. Ironically, the Canadian tightening has coincided with an actual easing of financial conditions.

The U.S. Fed stopped expanding its balance sheet in October 2014, and more or less left it at $4.5 trillion until recently. According to recent data, the Fed balance sheet consists of $2.5 trillion in treasuries and $1.8 trillion in mortgage-backed securities.