Major central banks are now diverging in their monetary policies


Dec. 4 2020, Updated 10:52 a.m. ET

Moreover, as I discuss in my new weekly commentary, major central banks are now diverging in their monetary policies, a dynamic we saw vividly on display last week with the Federal Reserve ending its quantitative easing (or QE) program, while Japan expanded its version of QE.

As expected, the Fed completed its QE program last week, citing substantial improvement in its labor market outlook and strength in the overall economy, while it deemed low inflation readings transitory. This suggests that the Fed is still likely to begin raising rates next year, probably over the summer.

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Market Realist – The Fed had introduced its bond buying (TLT) or quantitative easing program. The program had aimed to fight off the recession caused by the U.S. financial crisis (XLF) of 2008. In its October Federal Open Market Committee (or FOMC) meeting, the Fed announced the end of the third installment of QE, citing growth expansion and a stable labor market. The Fed started tapering its purchases of ten-year Treasuries (IEF) and mortgage-backed securities (VNQ)(IYR) in January of this year, as you can see in the above graph.

Market Realist – The graph above shows the growth rate of the U.S. gross domestic product (or GDP). The GDP grew by 3.5% in the third quarter. Though this is less than the 4.6% advance of the second quarter, the economy grew faster than analyst expectations of 3%. As per the BEA, export sales grew by 11% and business investment spending grew by 7.2% in Q3 2014, boosting economic growth.

Market Realist – Robust economic growth has also helped push down the U.S. government deficit. At 2.8% per cent of GDP, the deficit is the lowest we’ve seen since 2007. You can see this development in the graph above.

Market Realist – The labor markets look largely positive. The non-farm payroll report for September showed an addition of 248,000 jobs in September, as you can see in the previous graph. Unemployment currently stands at 5.9%. This is the first time it’s ticked below 6% since the financial crisis.

Read on to the next part of this series to see how growth has been soft in the rest of the world, which has led to a divergence central banks’ policies.


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