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What is Keeping Central Bankers Awake at Night?

What is Keeping Central Bankers Awake at Night?

August 10, 2021

If you were the head of one of the world’s top central banks, such as Jerome Powell of the Federal Reserve Bank, you would have access to a lot of information and data that the rest of the world is not privy to. Given where we sit today from an economic growth, inflation, and viral pandemic standpoint, what would keep you awake at night?



To give us some insight into that question, UBS recently released the results of its Annual Reserve Managers survey (chart above). It seems that at the moment the biggest concern is failure to end the global viral pandemic. As we are now seeing cases spike, even among those who were previously vaccinated, due to the COVID-19 Delta variant, this seems like a valid place for them to focus concern. There are certainly potential actions that could come to the fore if rise in cases leads to new social restraints that could slow economic growth.

 

The second issue was related to government debt levels, which showed up on 71% of the respondents surveys. We have seen a massive build up in government debt around the world in response to the coronavirus pandemic. It seems that central bankers understand that the current trajectory is not sustainable.

 

As we look at the chart below, we can see a massive spike in Fed stimulus and support as the coronavirus imposed economic shutdowns and social distancing as quarantine restrictions took hold. This would seem appropriate and reasonable to keep the economy from going off the cliff. However, as the National Bureau of Economic Research (NBER) recently reported, the recession lasted just two months. We know that the US economy is now growing at its fastest pace in nearly 40 years. As you look at that chart again, you can see that the Fed is continuing to stimulate the economy in a substantial way, even in the face of this growth. This is something that has never been done before, and it begs the question why we would be doing it now?



Finally, the third largest concern was inflation. There are two things we should note about this. The first is that inflation was not even on the list of concerns when this survey was taken one year ago. That shows us how quickly inflation has become an issue. The second is that there were more than 100,000 articles published about inflation during the month of May. In an amazing coincidence, this was far more than the number of articles published about COVID-19 in the same time frame.

 

We want you to be armed with knowledge, information, and real time relevant data as we strive to help you make smart financial and investment decisions. We will continue to pay attention to these issues as we help guide you through the financial maze to accomplish what is most important in life. We believe this is our mission as we continue “Moving Life Forward”.

© 2021 Jesse Hurst