LONDON Even if to tighten monetary policy you must first stop loosening it, it's a beguiling notion that halting outright money printing might actually bring down borrowing costs.
As the world's major central banks -- Japan apart for now for obvious reasons -- attempt to normalise extraordinarily loose interest rate and credit policies in the face of a robust global recovery and rising inflation, soundings from the U.S. Federal Reserve are critical as always.
Although well-established on the hawkish branch of the Fed's policymaking tree, Dallas Fed chief Richard Fisher this week put forward an important twist on case for tightening -- or at least, as he would put it, to stop loosening.
"If that policy (the Fed's latest round of money printing) runs through June and we stop, I could envision a scenario where rates might actually come down," Fisher said on Monday.
Fisher's argument seems to be that the extraordinary Fed policies to re-liquefy the U.S. economy since the credit crisis, namely the bond buying or money printing called quantitative easing (QE), may have reached a point where they are stoking inflation expectations and pushing up long-term borrowing rates.
In effect, to continue to print money after the second bout of Fed money printing, or "QE2", ends in June could even neutralise the effect of maintaining near zero official interest rates by starting to push long rates higher.
And so, far from spooking credit markets about the start of draconian Fed tightening, halting QE when the $600 billion (367 billion pounds) programme ends in June -- or even mopping up freshly minted bucks -- could actually help the economy by nipping inflation fears in the bud and lowering economically powerful long-term rates important for the likes of mortgages and car loans.
Put another way, printing fewer dollars should improve confidence in the currency over time and tempt foreign central banks and investors back to Treasuries -- at least each time yields nudge higher.
CORE TO HEADLINE
Now, intriguing as that argument might be for hawks arguing for a halt to QE, it's a big leap of faith in terms of market behaviour. After all, the Fed programme is about bond buying and simple supply and demand would suggest that the exit of the central bank as a bidder in that market would lift long rates.
But let's stick with the inflation line that Fisher spins.
There's little doubt that surging oil and food prices over the past six months have exaggerated inflation rates around the world, even if Fed doves point to sedate core price rises that exclude commodities and also pretty tame wage inflation.
It's this persistence of energy and food price inflation that is having a significant effect on inflation expectations and why there may be good reason for the Fed to worry longer-term that wage bargainers and businesses may act soon on where they believe consumer prices will be down the road.
The bellwether Thomson Reuters/University of Michigan monthly U.S. consumer survey shows expectations for inflation in one year's time has surged to 4.6 percent from 3.0 percent at the end of last year and far in excess of March's 2.7 percent.
Five-year inflation expectations are better-behaved at about 2.9 percent as current "core" inflation remains under wraps.
But the connection between Fed money printing, world commodity prices and inflation expectations bears watching.
Britain and Japan are still printing money too alongside the U.S., world growth is set for a trend-busting 4.4 percent this year, and giant developing economies such as China and India are struggling to contain inflation running at 5 to 10 percent.
JPMorgan said its measure of global headline price inflation rose some 0.3 percentage points to a 3.4 percent last month.
In assessing just how much this money printing has actually affected long-term borrowing costs, Fed researchers in January estimated the net effect of both the first two rounds of QE was to lower 10-year Treasury yields by about 50 basis points.
On its own, they reckon QE2 might have cut yields by about a quarter point in the final quarter of last year.
Taken further, and using rules of thumb developed by the International Monetary Fund on global capital flows, economists at Bank of America Merrill Lynch reckon a quarter point cut in 10 year Treasury yields may have boosted flows to emerging economies by some $60 billion over the latter part of 2010.
By extension, the net impact on emerging flows of the whole QE programme since 2008 would have been about $120 billion.
How much additional money has found its way directly or indirectly to the global commodity market and food prices is another guess. An 8.5 percent drop in the dollar .DXY against major world currencies and the impact of that on dollar-priced commodities is just one loose gauge of that.
But the risk is the longer persistently high global growth and commodity prices stoke inflation expectations, then the greater the chance high headline inflation translates to core inflation and creeping long term borrowing costs everywhere.
And if that indeed is the way the bond markets are already thinking, then turning off the money-printing presses at least may well have the virtuous effect of reining in long-term interest rates and play its part in insulating the recovery from any renewed headwinds.