Markets second-guess policy rollback: Mike Dolan

The once resolute "whatever it takes" message of government support for pandemic-hit economies is fraying at the margins as some recovery from the COVID-19 shock emerges, leaving buoyant markets pondering the prospect of ebbing stimulus.

Government ministers are starting to stress that borrowing can't keep rising at this year's pace for much longer, even though winding down fiscal action at a time when the rebound is incomplete, and the virus still spreading, could be jarring.

But investors insist that leaves central banks back doing the heavy lifting once more, suppressing borrowing rates for years to come to keep affordable the highest stock of developed world government debt relative to output since just after World War Two, and regardless of any pickup in inflation. And the deeply negative long-term "real", or inflationadjusted, borrowing rates this delivers - currently below -1% in the United States and parts of the euro zone on a 10-year horizon - has already supercharged the parallel surge in equities, bonds, gold and property over recent weeks.

While forecasters such as Deutsche Bank and Goldman Sachs have scaled back the extent of their expected 2020 economic contractions, their interest rate horizon barely changes at all. "We expect monetary policy to remain highly supportive, with no hikes from the Fed until early 2025," Goldman's chief US economist Jan Hatzius told clients.

What's more, market pricing still hasn't ruled out the possibility of Federal Reserve policy rates going negative over that horizon despite routine pushback from Fed policymakers. But that easy money vista is starting to mirror signs of fiscal exhaustion.