Negative yields in the rear-view mirror may be closer than they appear

As inflation anxiety is on the rise in most markets and policy corridors, the world’s central banks have evolved their monetary policy to an outcomes-based focus – as opposed to a forecast – which highlights their confidence that persistent inflation will rise above a target, such as the Federal Reserve’s (the Fed) two per cent benchmark.

This outcomes-based focus for both fiscal and monetary spheres is known as swift reaction functions, and in the wake of COVID-19, has allowed global growth to be bridged, leading many countries and regions back onto a path of reaching pre-pandemic GDP levels. While these strong liquidity injections have been successful in their desired outcome, the abundance of liquidity also carries the risk of unintended consequences.