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Why Monetary Policy Remained in Focus in October

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US FOMC minutes

Like in September, monetary policy and associated releases were made headlines throughout October.

The minutes of the US FOMC (Federal Open Market Committee) meeting were released on October 12. They provided much greater detail into the meeting, showing that the status quo was a much closer call than could have been anticipated from the vote. The minutes themselves stated, “Among the participants who supported awaiting further evidence of continued progress toward the Committee’s objectives, several stated that the decision at this meeting was a close call.”

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The minutes did not stop there. They noted that some FOMC participants believed a rate hike could be effected “relatively soon” if economic activity gathered momentum and if labor market metrics improved. However, participants wanting to wait further for inflation to firm up had their way, and the FOMC stood pat in September on the federal funds rate.

US equity markets (DIA) were marginally higher on October 12, the day of the September monetary policy meeting minutes’ release.

ECB policy decision

But the highlight in terms of monetary policy was the ECB (European Central Bank) meeting. Earlier this month, some unnamed ECB officials had told Bloomberg that the central bank may be thinking about tapering its bond buying program. Due to this development, one of the key points that the market was looking forward to hearing about was the fate of the quantitative easing program of the ECB. This program led to a rise in yields across Europe.

However, ECB chief Mario Draghi had nothing to say about either tapering or extending the bond buying program in the post-policy conference on October 20. At present, the ECB conducts monthly asset purchases of 80 billion euros, which is expected to continue until March 2017 or beyond, if required.

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Due to speculation about tapering, participants in the press conference following the policy release wanted to know whether the ECB had discussed the issue. Several times during the press conference, Draghi said that the ECB had neither discussed the extension of the asset purchase program beyond March 2017 nor discussed tapering.

On another question regarding whether extension and tapering will be on the agenda in the December meeting, Draghi responded, “We haven’t really yet discussed that at all.”

The impact of the statement release on financial markets was moderate. The headline stock indices in France (EWQ), Germany (EWG), and Italy (EWI) rose between 0.4% and 0.6% on October 20. Spain’s (EWP) Ibex was up 1.2% while the United Kingdom’s (EWU) FTSE 100 rose just 0.1%.

Reserve Bank of India cuts rates

In India (EPI), the Monetary Policy Committee reduced the country’s key rate—the repo rate—by 25 basis points on October 4, 2016. The rate stands reduced to 6.25% from the said date. The October meeting marked the second rate cut in 2016. The combined total of the cuts for the year stands at 50 basis points.

Looking ahead

The Bank of Japan and the US Federal Reserve will release their respective policy statements on November 1 and November 2, respectively. All eyes will be on the US presidential election, as it will give some direction to the economic and financial future of the US economy and markets, respectively.

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