The Fed’s Monetary Policy: How Long Can the Hawks Fly?
The US Fed as market mover
Before Trump, markets had been gripped with anxiety whenever the US FOMC (Federal Open Market Committee) was approaching a decision about hiking the interest rate. FOMC members meet eight times every year to discuss the state of the economy and decide on any monetary policy action that would have to be taken to keep the economy running at an optimal level.
The quantitative easing program (buying US government backed Treasuries [TLT] and mortgage-backed securities [MBG]) in late 2008 by the Fed and the interest rates in the US remaining close to zero have both helped the US come out of recession.
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In 2013, the Fed began unwinding its quantitative easing program and stopped buying these securities in October 2014. The Fed has now initiated the process to bring interest rates slowly back up to normal levels and has raised interest rates three times as of March 2017, with plans to have at least two more rate hikes this year.
Why does the Fed matter?
If this rate normalization cycle continues, there are chances that these funds will find their way back to the US, causing a sell-off in major asset classes across the globe. For this reason, the Fed’s comments are closely watched and US interest rate decisions impact global markets volatility. Banking (BAC) (JPM) and insurance companies (AMSF) (CB), which rely on interest income, are likely to be adversely affected.
What should we expect?
The Fed has been successful so far in preparing markets for any of its policy actions, and we can expect them to continue doing the same. The risk here is the unpredictability of the US and global economic performances, in addition to fiscal policies from Trump, which could force the Fed to act sooner than markets expect.
In our view, Fed’s decisions have a major impact on global volatility and thus investors should be always watching out for any Fed-related news.
Continue to the next part for a look at the European Central Bank.