The era of free money is ending

By Julia Horowitz, CNN Business

For about 20 months, central banks have funneled an unprecedented amount of cash into the financial system, aiming to limit the worst effects of the Covid-19 pandemic on the economy. Now, with an eye on inflation, they’re changing course — with big ramifications for stocks and bonds.

What’s happening: The US Federal Reserve said Wednesday that it will begin to reduce asset purchases, a key part of its stimulus efforts, by $15 billion each month. The program is set to wrap up by the middle of 2022.

It’s not alone. Australia’s central bank also took steps to tighten monetary policy this week, while the Bank of Canada said last week it would stop expanding its balance sheet. The European Central Bank is also slowing the pace of its purchases this quarter.

Given the policy shifts, you would think investors might be panicking. After all, the amount of cash in the system has been the major force behind market euphoria following the pandemic crash.

“The main driver in the market today, it’s this phenomenal pool of liquidity, ” Vis Raghavan, JPMorgan’s CEO for Europe, the Middle East and Africa, told me this week. “The market is just awash with money. Every asset class is exceptionally busy.”

But there’s been no “taper tantrum” as there was in 2013, when the Fed signaled that it would eventually decelerate asset purchases, sparking a sharp bond selloff and global market turbulence. The Dow, S&P 500 and Nasdaq Composite all hit all-time highs on Wednesday, and the bond market is holding steady.

Why? First, the messaging has been extremely clear. Raghavan thinks it’s also evident that central banks would be willing to go all-in again should the post-pandemic recovery go south. After 2020, their willingness to flex their muscle is no secret.

“No one wants any economic tumult to sack this recovery,” he said. “Whatever happens, there will be intervention to assure there’s no economic pain.”

Fed Chair Jerome Powell — who last year saw the central bank’s balance sheet grow to $7.4 trillion, the highest level on record — indicated as much on Wednesday.

“We are prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” he said.

But with inflation rising at the fastest rate in three decades, the question now is whether central banks will need to taper stimulus even more aggressively or risk missing their moment to keep a lid on price increases. That will require careful communication to keep investors on the same page.

Powell said the Fed won’t raise interest rates until the labor market makes more progress. But does the central bank risk getting left behind?

Watch this space: There was a chance the Bank of England would become the first major central bank to raise interest rates since the crisis hit on Thursday — but it held rates steady at a record low 0.1%. Bank of America’s team thinks the central bank will hike rates twice by February.

OPEC is under serious pressure to pump more crude

Even as the world debates the end of fossil fuels at COP26 in Glasgow, OPEC and its allies are discussing whether to pump more oil to ease soaring prices that are fueling global inflation and hurting vulnerable households.

The latest: Energy ministers from major producers including Saudi Arabia and Russia meeting virtually on Thursday are under pressure from big customers such as the United States to increase production by more than the planned 400,000 barrels per day, my CNN Business colleague Charles Riley reports.

Speaking earlier this week at the climate summit in Glasgow, President Joe Biden said that rising gasoline prices are “a consequence” of “the refusal of Russia or the OPEC nations to pump more oil.”

“We’ll see what happens on that score sooner than later,” Biden added.

Step back: The price of Brent crude oil, the global benchmark, has doubled over the past year to more than $83 per barrel as the global economy rebounds from its pandemic slump. Bank of America predicts that prices will zoom even higher and hit $120 per barrel by June 2022.

Soaring oil prices would dampen the recovery at a crucial moment, and elevated gasoline prices could have political ramifications for Democrats heading into the 2022 midterm elections. US gas prices have surged to a seven-year high of $3.40 a gallon nationally and are flirting with $4 in Nevada, Washington and Oregon.

Remember: OPEC member countries produce about 40% of the world’s crude oil. OPEC has been coordinating production decisions in recent years with other major producers including Russia as part of a larger grouping called OPEC+.

“The external flex on OPEC+ from oil-producing countries is mounting, especially from the United States,” said Rystad Energy analyst Louise Dickson.

Web Summit CEO says regulators should look to China

Looking to put the pandemic behind them, more than 40,000 people are in Lisbon for Web Summit, Europe’s largest tech festival.

A lot of them are talking about Facebook. Whistleblower Frances Haugen kicked off the event Monday by asserting the company would be “stronger” if founder Mark Zuckerberg stepped down as chief executive. On Wednesday, Chris Cox, Facebook’s chief product officer, said that the social media giant welcomed “difficult conversations.”

“It’s good for us and it’s good for society,” he said, while touting the company’s pivot to virtual and augmented reality technologies. “We are not perfect.”

Web Summit CEO Paddy Cosgrave told me that the arrival of whistleblowers on the scene is helping regulators build momentum.

“They’re moving faster than they’ve ever moved before to write legislation to begin to address some of these problems,” he said in an interview.

One potential model? Cosgrave thinks regulators should look to China, which he said is implementing “very sensible policies” related to social media and protecting children.

Earlier this year, Beijing barred online gamers under the age of 18 from playing on weekdays. Douyin, the Chinese version of TikTok, is introducing a “teenage mode” limiting the amount of time children under the age of 14 can spend on the app — a move seen as an attempt to get ahead of potential regulation.

Up next

Cars.com, Dine Brands, Kellogg, Moderna, Nikola, Papa John’s and ViacomCBS report results before US markets open. Airbnb, Datadog, Expedia Group, Live Nation, Pinterest, Redfin, Square and Uber follow after the close.

Also today: Initial US jobless claims for last week post at 8:30 a.m. ET.

Coming tomorrow: A strong US jobs report for October could feed chatter about the Fed hiking interest rates sooner than expected.

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