Why the Fed is ready to raise rates but Europe isn’t

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Major central banks are no longer moving in lockstep. While the Fed is pulling back, other central banks are maintaining very easy monetary policy. Russ explains three implications this new dynamic has for investors.

Major central banks are no longer moving in lockstep.

In addition to continuing with its tapering program, the Federal Reserve (the Fed) may move to normalize interest-rate markets earlier than some expect, given that recent strong economic data – including labor market and manufacturing reports – confirm that the U.S. economy is recovering at a steady pace.

But while the Fed is moderating its monetary accommodation and will likely start to raise rates by next year, other central banks are moving in the opposite direction.

Market Realist – The graph above shows that the unemployment rate has been gradually decreasing over the last two years from over 8% to ~6%.

The equity market (SPY) has taken the improved macroeconomic conditions as a positive signal, causing it to rally. The bond market (BND) has taken a more selective route. Corporate bonds have rallied while Treasuries (TLT) have remained resilient, and high yield bonds (HYG) are feeling the pain.

Some of the major central banks, like the European Central Bank (EZU) and the Bank of Japan (EWJ), need to ease credit conditions to expand their respective economies. But their American counterpart has the luxury of cutting down its bond purchases and increasing rates, which is causing the divide.

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