“The Bank of England said it will buy long-dated British government bonds to “whatever scale is necessary” in order to restore orderly market conditions.”
Central banks are keenly aware that one of the systemic risks that can occur due to rising interest rates is, at some point, a potential disorderly capital market flight to safety.
While only one central bank has acted to intervene today, it sends a powerful message that the greatest issue hanging over capital markets during an economic recession, a systemic lack of liquidity, will be addressed using mechanisms that have historically prevented/mitigated market routs.
Long dated bond purchases will not spell an end a recessionary economy but will serve to mitigate a “piling on” from market actors seeking to unduly profit from a reduction in money supply by betting against the economy and trying to exacerbate recessions. This indirectly provides assurance to corporations that their various capital plans may continue largely as before, with the proviso that the carry cost of funds remains higher.
If systemic risk may be minimized, the dreaded “black swan” events prevented, then recessionary impacts may be appropriately modeled within the proper context.
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