Monetary Policy

  • Is politicizing monetary policy good for the U.S., or anyone?

    Congress Tries to Assert Control Over the Federal Reserve

    The British historian Lord Acton famously said, "power corrupts and absolute power corrupts absolutely."  The American response is a system of checks and balances.  The Federal Reserve represents a concentration of power that became abundantly clear during and after the Great Financial Crisis. 

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  • The Fed and ECB will make December memorable.

    A December to Remember

    December will be a month to remember.  ECB President Draghi continued to fan expectations of further accommodative measures at the December 3 meeting.  At the same time, the strength of last week's US employment report, reinforced by comments from the Fed's leadership, has convinced many that lift-off is likely a fortnight after the ECB meeting.  Following the jobs data, a Reuters, poll found 15 of 17 primary dealers expect the Fed to hike rates next month.

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  • If the Fed raises rates too soon, the ripple effect could be global.

    What if the Fed Rate Hike Comes Too Soon?

    After 271,000 were jobs added in October, US unemployment rate fell to 5.0 percent. Meanwhile, average annual hourly earnings climbed by the most since 2009. As a result, the dollar strengthened and treasuries plunged. The report was a green light for the Fed’s chief Janet Yellen and her deputy Stanley Fisher, who recently held out the possibility of a December rate increase.

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  • Yes, the Fed may hike rates in December, but the ECB has other ideas.

    Leaning Towards a Rate Hike

    The US dollar and yields surged as the divergence meme, increasingly doubted, returned with a vengeance.  The 271k rise in nonfarm payrolls was most this year. The 2.5% year-over-year increase in average hourly earnings is the most in six years. 

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  • The divergence meme is still in play between the U.S. and everyone else.

    Central Bank Scorecard

    Divergences in central bank policies continue to drive the global investment environment. This holds true not just across Developed Markets, but Emerging Markets as well.  We thought it would be helpful to summarize our expectations of central bank policies going forward.

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  • Some believe, on technical grounds, that the Fed will wait until next year.

    Not All are Convinced of a December Rate Hike

    The US-German 2-year interest rate differential (swap rate) is a useful directional guide to the euro-dollar exchange rate.  At about 105 bp, it is the highest since 2005.  The US premium had peaked in late 2004 near 185 bp.  In the second half of the 1990s, it was common for the US premium to be in excess of 250 bp.  It has risen 25 bp since the middle of October, encouraged by Draghi, whose dovishness again surprised investors. 

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  • Can the US Fed raise rates at the same time other central banks cut?

    Diverging Monetary Policy Expectations

    A critical driver in the foreign exchange market and the global capital markets more generally, is the continued preparation by the Federal Reserve for a rate hike, while many other central banks, including the ECB, warn investors that more accommodative monetary policy may be necessary.  In the days ahead, the economic data and official speeches will occur in the context of building expectations.

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  • Could the RBA cut rates in the face of banks raising them?

    A Call for Rates Down Under to Go Down

    When Australia’s Reserve Bank board meets on Melbourne Cup day next week, the question at hand is whether the RBA will seek to offset recent bank rate raises with a cut to the cash rate. With a cut, the hope is banks will then reverse their decision and get mortgage rates back to where we were before.

    First Westpac, then Commonwealth Bank, now all of the big four have raised their variable home loan rates, purportedly in response to more stringent capital requirements imposed upon them.

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  • Investors are overlooking other central banks in favor of the BOJ and FOMC.

    The BOJ and FOMC Capture Investors' Attention

    The Reserve Bank of New Zealand and Sweden's Riksbank can still surprise investors, but it is the BOJ and FOMC meetings that are the talk of the markets.  Surveys suggest that around 40% of investors expect the BOJ to expand its asset purchases program this week.  We are less convinced.  Moreover, many real money clients spoken think the BOJ sticks with its current target of increase base money by JPY80 trillion a year.  This raises the possibility that the surveys are not sufficiently up-to-date.

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  • Four central banks meet this week, none with easy agendas.

    Central Bank Decisions Complicated by Diverging Economies

    The European Central Bank and the People's Bank of China reanimated divergence as a critical driver just when many observers had all but given up on it.  The divergence is about monetary policy, broadly understood, not about the data per se.  Of course, there is a relationship between the two but it may not be particularly tight. 

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