Fed, ECB and BoJ Turning Global Policy to Hawkish Course?
• The Federal Reserve is an obvious hawk amid a field of doves, but the other largest central banks may not be so dovish
• While the ECB, BoJ, BoE and others are still sporting large stimulus programs; they are slowly normalizing (easing off)
• Risk trends face a serious threat from an adjustment to tighter policy, but it will also seed a return of true trends
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We have seen the effectiveness of dovish monetary policy fade steadily over the past few years. This is in part due to the diminished economic and financial capabilities of these programs as well as the increasingly competitive position among the major players. However, another component of this tide change is the fact that these central banks are starting to reverse course. For the Federal Reserve, we have already seen an explicit change in tack. The two rate hikes over the past 14 months is a clear contrast to its peers as is the forecast for three more 25 basis point hikes over 2017. Yet, the US central bank isn't the only key player that is showing signs of reversing course. Others are just earlier in their transition - just as when then-Fed Chairman Ben Bernanke laid the groundwork for the 'Taper' in 2013.
What matters in monetary policy is not necessarily how expansive the stimulus program or high the benchmark rate is at any given time, rather it is the anticipation of change. Speculation of change motivates deep and comprehensive repricing. The Bank of England (BoE) was the most recent outfit to significantly upgrade its stimulus effort with a fresh QE effort alongside a rate cut shortly after the Brexit vote. However, that came with an explicit expiration date. After this treatment runs its course, a dubious Governor Carney is likely to bide his time until the eventual normalization. For the Bank of Japan (BoJ), the seemingly endless stimulus program was theoretically downgraded when the group changed from a steady infusion of monthly purchases purchases to a focus on the 10-year JGB yield.
Even the European Central Bank (ECB) has turned the corner if President Draghi's remarks are to be taken at face value. The central banker remarked Monday that the December changes were made with greater confidence in the outlook. The event could have been construed either way with an extension of the purchases out to December though the amounts would be reduced after April. The implications for speculative trends are ominous at best. The speculative chase despite more tepid returns is easily read in the markets. Taking away the support structure - or safety net - carries troubling consequences. However, looking further ahead, a subsequent evolution of this course may be the return of long-term trends with genuine opportunities. We take another look at this big picture fundamental driver in today's Strategy Video.
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