Monetary Policy

  • Global tensions will likely be on the rise around the June FOMC meeting.

    This FOMC Meeting Overshadowed by June

    We expect the FOMC statement this week to recognize the improvement in the global conditions that have been an increasing worry for officials over Q1.  At the same, time the soft patch of the US economy is undeniable.  

    We suspect the Fed will look past the weakness of the US economy. The strength of the labor market, with weekly initial jobless claims at their lowest level since 1973 and continuing claims at their lowest level since 2000, it is difficult to get too negative the US economy. 

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  • The ECB meeting is today's headline.

    All About the ECB

    The ECB meeting is the session's highlight.  In recognition of the risk that ECB President Draghi expresses displeasure with the premature tightening of financial conditions through the exchange rate channel is encouraged a modest bout of euro selling.  The single currency has drifted back toward the lows seen at the start of the week near $1.1275. 

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  • Few will benefit from an uneven return to normalized monetary policy.

    Unconventional Monetary Policy and Unintended Consequences

    On August 2015, the People’s Bank of China devalued the yuan with the aim of appreciating the currency against the US dollar. On October 2015, the European Central Bank signaled the intention to pump more liquidity into the Eurozone economy. On October 2015, the Federal Reserve postponed its intention to conduct tapering on its monetary policy.

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  • Did the Fed give any indication of dovishness, or are they just less hawkish?

    Dovish or Maybe Just Less Hawkish

    A few short hours stand in the way of the long holiday weekend for many.  The capital markets are retracing the recent moves.  This means equities and commodities are lower.  It means bonds are firmer and the dollar stronger.

    The markets response to the ECB and FOMC recent meetings was to extend trend moves.  However, this entire week has been the counter.  The foreign exchange market illustrates this point. 

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  • Ultimately, the ECB is really buying time.

    Is the ECB Buying Assets or Time?

    The euro rallied shortly after the ECB announced numerous monetary measures that in their totality were more than expected.  Many saw this as proof that monetary policy had lost its effectiveness, and central banks have lost credibility.  

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  • Have enough factors changed to warrant cutting the number of hikes in half?

    Reconciling the Fed's Large Change in Forward Guidance

    If there was one word Yellen emphasized yesterday it was caution.  The dot plot reflected that as well.  Can one ask if the Fed is being too cautious?  

    Yellen acknowledged that the Fed's assessment of the US economy had not changed much from December.  There is little reason it should.  However, it is difficult to reconcile that with the substantial change in the forward guidance, and the halving of the rates hikes that are deemed appropriate this year.

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  • Doing 'Whatever it Takes' is a less-disciplined form of monetary policy.

    Monetary Policy's Strange New World

    There’s an old adage in economics that the best way to cure deflation is to drop money from helicopters. Clearly, this phrase isn’t older than mid-20th century, because before that time we didn’t have helicopters… we also didn’t have manipulative central banks. Now we have both, and they are about to join forces.

    The helicopter statement isn’t meant literally. It conveys how central banks approach an economy when mainstream – and even out of the mainstream – monetary policies have failed.

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  • The markets have discounted a June hike, but not March.

    A Rate Hike Today would be an FOMC Surprise

    Since the Federal Reserve hiked rates in December, both the European Central Bank and the Bank of Japan have eased policy further.  The idea that because they cut rates means that the Fed cannot raise rates is a not a particularly helpful way to think about that is happening. 

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  • Day one of the FOMC meeting while the markets digest ECB moves.

    The FOMC Meets and the ECB Moves Linger

    The market's focus has shifted to the two-day FOMC meeting that begins today.  The Federal Reserve should be pleased with recent developments.  Labor market slack continues to be absorbed.  Core inflation measures continue to edge higher. 

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  • The ECB may now be more tightly wedged into a corner.

    Interest Rate Policy vs. Monetary Policy

    The market reaction to Draghi's indication, once again, that interest rate policy has run its course, will be debated for some time.  Draghi delivered the goods that many investors said was lacking last December.  The ECB policy was more than anyone expected. 

    All the boxes were checked.  Although the end date was not extended beyond March 2017, the four-year TLTROS will run into the new decade, and Draghi indicated that rates would remain low well beyond the end of the asset purchases.  Moreover, the deadline was always soft. 

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