Risk Management, Trading & Portfolio Strategies

Bank of International Settlements warns against further loose monetary policy

Global central banks have been cautioned against more quantitative easing by the Bank of International Settlements.

Global central banks have been cautioned against more quantitative easing by the Bank of International Settlements.

The Bank of International Settlements (BIS) is known by many economists as "the central bank's central bank," as it acts to coordinate policy between institutions like the U.S. Federal Reserve and the European Central Bank. Since the outbreak of the financial crisis in 2008, the BIS has firmly stood behind global quantitative easing (QE) programs, which act to funnel much-needed liquidity into troubled markets. However, nearly five years after the world's economic problems bubbled over, the organization is now saying that QE could create the conditions for systemic risk and collapse.

According to The Telegraph, a U.K.-based news source, the BIS fears that unbridled monetary policy – which keeps interest rates artificially suppressed – could make it hard for market participants to accurately judge risk levels. The group warned that this inability may lead to a widening disconnect between asset prices and fundamentals, setting the stage for a large-scale correction in the future.

In its report, the BIS noted that quantitative easing was useful as it bought world governments breathing space to orchestrate much-needed economic reform. Yet the failure to do so in a timely manner has now made QE more dangerous with each new iteration.

"Continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system," the organization wrote. "After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change."

With these considerations in mind, investors may want to tread carefully and view asset prices and correlating fundamentals with more scrutiny. Utilizing SmartStops' system of portfolio management tools can help offer a more comprehensive method of ascertaining risk. For example, the Market Risk Barometer gives an accurate view of daily risk levels and points the way for investors who want to prepare or even benefit from rising volatility.

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