Is the End of Loose Monetary Policy Approaching?

On Wall Street, stock prices sharply fell on Tuesday as investors fear that the end of the era of extremely loose monetary policy, which leading central banks around the world have long supported capital markets, is approaching.

The Dow Jones dropped 116 points, or 0.76 percent, to 15,122 points, while the S&P 500 slid 1.02 percent to 1,626 points, and the Nasdaq index fell 1.06 percent to 3,436 points.

At the very beginning of yesterday’s trading, stock prices fell more than 1 percent. By the middle of the session, the indices somewhat reduced their losses, only to dive deeper into negative territory by the end of trading.

Such market instability has been prevailing for weeks due to fears that the U.S. Fed will soon reduce its stimulus monetary programs, and investors were further alarmed yesterday by the decision of the leaders of the Japanese central bank to keep monetary policy unchanged for the time being.

In April, the Bank of Japan adopted stimulus measures that will inject $1.4 trillion into financial markets over the next two years and indicated that it would further ease monetary policy if necessary.

Therefore, investors hoped that the central bank would announce additional measures. However, as it did not do so yesterday, speculation arose in the markets that the end of the era of cheap money is approaching.

Following the recent announcement from the Fed that it might reduce its stimulus monetary programs and yesterday’s decision from the BOJ, investors are questioning whether this is a shift in central bank policies or just a gradual withdrawal from the markets.

“Strong growth in stock prices was driven by good corporate earnings and signs of improvement in the economy, but the underlying idea has always been that cheap money from central banks would support price growth,” says Kevin Caron, a strategist at Stifel, Nicolaus & Co.

Since the beginning of the year, the S&P 500 index has risen more than 14 percent, reaching its highest levels in history in May. However, yesterday, stock prices fell in all 10 sectors of that index, with defensive sectors, such as healthcare and consumer goods manufacturing, recording somewhat smaller losses.

“Now some central banks are telling us that we should expect less from them in the future. By not further easing monetary policy, the Japanese central bank has also sent us that message, and the weakness of stock markets worldwide shows how unsettled investors are,” says Kevin Caron.

Stock prices also fell on European exchanges yesterday. The London FTSE index weakened by 0.94 percent to 6,340 points, while the Frankfurt DAX slid 1.03 percent to 8,222 points, and the Paris CAC fell 1.39 percent to 3,810 points.