Why Has the Efficacy of Monetary Policy Accommodation Declined?
Bill Gross: The US Economy Needs a Steeper Yield Curve
The efficacy of monetary policy accommodation
The efficacy of monetary policy accommodation has fallen. Interest rates have been zero bound for over six years now. In fact, the efficacy of monetary policy accommodation in boosting growth in the economy has weakened in the wake of several factors. They are the currency war, falling commodity prices exerting deflationary pressures, and the economic slowdown in all major trading partners of the United States.
Strengthening dollar and weakening commodity prices
The strengthening dollar (UUP) has hurt US exports. Read our earlier series, No US Economic Sector Is Untouched by the Currency Wars, for more insight into how the currency war is affecting the US (SPY) economy. Further, the commodity price fall has acted as a major dampener on growth prospects of commodity export-driven economies.
The United States is a major exporter of oil (USO) and energy products. Moreover, with its top trading partners experiencing low or no growth conditions, US businesses are feeling the brunt, as is evident in the falling corporate profitability in the United States.
The chart above shows how the ROE (return on equity), a measure of profitability, of the benchmark S&P 500 (SPY) index in the United States has been falling. Canada (EWC), Mexico (EWW), China (FXI) (YINN), Japan (EWJ), and Germany (EWG) are the United States’ major export destinations. Lack of orders coming from these regions is restricting factory output and industrial growth in the United States.
In fact, while cheap money is usually expected to boost credit growth in the economy, it has been, in a way, restricting credit growth in the United States.
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