Daily Insight
Group Economics Macro & Financial Markets Research
18 November 2016
The great monetary policy divide Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Global central banks: Mind the chasm - Communication from the Fed and the ECB yesterday confirmed that the two central banks will likely move in opposite directions when they meet next month (see below). The Fed is expected to hike its policy rate by 25bp at the FOMC meeting on 14 December. Before that, on 8 December, we expect the ECB to extend the time horizon of its QE programme. Next year these trends should continue, with the Fed hiking further and the ECB eventually continuing its QE programme through year end. We think markets are underestimating the Fed’s rate hike path for next year, while fears of an ECB taper have been hanging over financial markets. So this great monetary policy divergence should see government bond yield spreads between the US and Germany widening further and the dollar strengthening versus the euro. (Nick Kounis) Fed view: Chair Yellen signals rate hike coming soon – During Chair Yellen’s testimony before the Joint Economic Committee of Congress on Thursday, she signalled that an increase in the federal funds rate ‘could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives’. US macro data have been strong recently. The labour market and economic activity have improved since the start of the year, while wage gains and inflation have picked up at a somewhat faster pace in the past couple of quarters. This intervention is the first of Chair Yellen after the US presidential elections. Her view on the outlook was nuanced. Chair Yellen mentioned that she expected economic growth to continue at a moderate pace, sufficient to generate further strengthening in the labour market conditions. She also said that the economic outlook is ‘inherently uncertain’, and that the path of rate hikes c ould change. She did not refer to any additional fiscal stimulus as part of the outlook. Meanwhile Stanley Fischer, the Vice-Chair of the Federal Reserve, said earlier this week that he favoured a gradual approach to tightening policy to mitigate the impact of spillovers abroad and that he would welcome fiscal support for the economy. We expect a rate hike in December and a gradual pace of rate hikes in 2017. (Maritza Cabezas) ECB view: Minutes signal QE extension – The account of the ECB’s October Governing Council meeting was interpreted as having a hawkish tone by financial markets, but we disagree. The line in the account that seemed to generate these worries was that the Governing Council was ‘mindful not to trigger undue expectations in financial mark ets about future monetary policy action’. However, in our sense this simply means the ECB did not want to pre-announce an extension of monetary stimulus given it would be getting new information at the December meeting when it would decide what to do. In particular, there would be updated projections for growth and inflation as well as the technical work from the Committees on the options to expand the eligible universe of assets for QE purchases. Meanwhile, the general commentary from the minutes suggested further stimulus would be necessary and that the ECB would extend QE rather than starting to taper its asset purchases. The account notes that ‘underlying inflation…continued to lack clear signs of a convincing upward trend’. In addition ‘overall, wage dynamics appeared to have surprised on the downside’. Crucially, ‘members widely shared the view that it was imperative to remain fully committed to preserving the very substantial degree of monetary accommodation that
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Daily Insight - The great monetary policy divide - 18 November 2016
was necessary to secure a sustained convergence of inflation towards levels below, but close to, 2% over the medium term’. We continue to expect the ECB to extend the horizon of QE to September 2017 from March 2017 at the December meeting, with asset purchases continuing at the same pace. (Nick Kounis)
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Daily Insight - The great monetary policy divide - 18 November 2016