Gains for global equities have left many on Wall Street perplexed as stocks — especially high-risk growth names with little or no profits — have rebounded from last year’s punishing selloff, resisting both the pull of more attractive bond yields, and the threat of higher interest rates.
The upshot is this: The Federal Reserve, European Central Bank and Bank of England have advertised that they’re trying to drain the ocean of banking-system liquidity, but on a global scale, liquidity has actually increased in recent months. That’s due in part to factors that are outside the control of policy makers.
In his report, King said he was inspired to take a closer look at central-bank balance sheets after concluding that changes in the fundamentals — meaning the outlook for the economic growth and inflation — failed to explain moves across global markets, including a rebound in global equity prices. For more than a year now, the Federal Reserve has been trumpeting its plans to “tighten” liquidity in the U.S. financial system by raising interest rates and reducing its bond holdings by opting not to reinvest the proceeds from maturing bonds.