Major central banks are no longer moving in lockstep.
In addition to continuing with its tapering program, the Federal Reserve (Fed) may move to normalize interest-rate markets earlier than some expect, given that recent strong economic data – including last week’s 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.
Last week, given the growing risk of deflation in Europe, the European Central Bank (ECB) further eased monetary policy. Included in its actions was a move to push short-term deposit rates into negative territory, the first time a major central bank has attempted this. The ECB’s combination of rate cuts and other measures, including a commitment to expand its arsenal if necessary, add up to a significant easing of credit conditions. Elsewhere, we believe the Bank of Japan (BoJ) is likely to continue its own very aggressive asset purchase program through 2016.
As I write in my new weekly commentary, this growing divide has three implications for investors.
Low global interest rates in the near term. Even as the Fed pulls back, global interest rates are likely to stay low, and liquidity high, for the remainder of the year, given that other central banks aren’t following in the Fed’s footsteps. Relatively low rates – coupled with low inflation and a recovering economy – should be supportive of stocks.