Structural or thematic topics
After being left reeling by the unexpected money-market crisis during its first round of quantitative tightening (QT1), the US Federal Reserve (Fed) intends to manage the second (QT2) with the utmost caution. This means reducing its securities portfolio without creating a shortage in central bank money, in view of the liquidity requirements imposed on banks under the Basel 3 framework. As it is unable to estimate the optimum amount of central bank reserves needed to ensure that its monetary policy is properly implemented, the Fed aims to reduce the stock of reserves to a sufficiently "ample" level.If QT2 is ended too early, it would have to activate its liquidity draining tools in order to limit the downwards pressure on short-term market rates
Government bond yields in advanced economies are highly correlated, much more than the correlation of real GDP growth. Governments should be cognizant that a lack of fiscal discipline can create negative externalities, by pushing up bond yields abroad. Given the prospect of huge financing needs in the public and private sector, every issuer of debt should prepare for the possibility of structurally higher interest rates and stress test his balance sheet in order to test its resilience.
The impulse of bank lending to the private sector continued to recover in the Eurozone in Q4 2024 (1.5 after between 1.1 and 1.2 since September 2024). It was back in positive territory since August (0.8), and in December 2024 it reached its highest level since November 2022 (2.7). The ECB bank lending survey in the Eurozone confirms the recovery in the demand for loans in Q4 2024. However, political uncertainties have resulted in a tightening of credit standards for lending to companies in France and Germany.
