For central banks, there are no red lines. Monetary tightening may have become impossible.

Think back: In January 2013 the Fed announced that it would raise its bond buying from $40 billion to $85 and would keep buying bonds and maintaining zero rates until unemployment dropped to 6.5%. Unemployment then was 7.7%.   Today unemployment is 6.3%, but bond buying continues, albeit at a reduced rate, and zero rates persist.  Yesterday Yellen said these policies would continue and bond buying might increase again if housing weakness and unsatisfactory conditions in the labor markets persisted.

 

Meanwhile in the UK Bank of England Governor Carney, who had previously said he would tighten policy when growth reached "escape velocity," which, at more than 3% (.8% q/q, 3.2% y/y in Q1) , it has, now says he's waiting for "sustained momentum".  Chris Giles in FT notes that he does this while at the same time denying he has changed policy.

Maybe it is impossible for any single central bank to tighten policy without dire consequences on the trade and capital flow fronts?  New Zealand, for example, wants to raise rates to curb speculation but cannot do so because its currency is too strong.  It’s a sort of prisoner’s dilemma:  Once a critical mass of countries have bad policies, it is in the interest of each to be the last to implement good policies. The result is paralysis, and perhaps danger.