Too many cooks spoil the broth
There is an adage amongst investors that says that investments do best at the start of an easing cycle while the opposite is true at the start of a Central Bank tightening bias. There is no room for prevarication among central bankers.
Being the driver of the entire economy, it is beholden upon them to be decisive and clear in their guidance to the markets. During the time of Alan Greenspan and then Ben Bernanke, there were occasional utterings from the Presidents of the regional Fed’s but it was only when they spoke that the market took notice. This whole committee-driven methodology where the role of the Chairman, President or Governor has been diluted somewhat and is a direct consequence of the Global Financial Crisis breeds uncertainty and therefore confusion in Financial Markets.
Mario Draghi has been beaten to the punch recently by ECB Council Members Ardo Hansson and Benoit Coeure while it can be argued that Gertjan Vlieghe’s intervention last week when he “turned on a dime” from dove to hawk overshadowed the comments the day before from Governor Carney.
So it is with the Fed, Regional Presidents outline their view of the economy and permanent members provide warnings over the outlook for inflation. Janet Yellen, the Fed Chair, is left with little to say at her press conference since she doesn’t want to be at odds with her colleagues.
FOMC meeting to provide more questions than answers
There is a whole generation of currency traders who have “grown up” without seeing the effect of rate hikes or a tightening of monetary policy. Reading about such events and experiencing them in person could not be more different.
It is doubly difficult when these events and the pressure for them is happening in what can still be considered a low inflation environment. The quantitative easing which the Fed, ECB and BoE undertook to provide liquidity at the height of the crisis remains and it is a matter of considerable discussion when it will be tapered. The ECB has been threatening to discuss it for some time and now President Draghi has said that it will be on the agenda next month. It is rumoured that today’s FOMC meeting will announce the start of the reduction of the size of the Fed’s balance sheet. The BoE is still grappling with “other matters” so the Asset Purchase Programme has been left to itself for the time being.
Just as no one was sure what the effect of QE would be, so no one is certain what will happen when it is taken away. It is a bit like when the first astronaut re-entered the earth's atmosphere, no one know what will happen and figurative breath will be held until all returns to normal and the capsule lands.
Brexit cracks widen
Tightening monetary policy is a lot like Brexit in that no one knows just what the effect will be. Is it as black and white as it is portrayed by the media and political analysts? Will it be a disaster as remain campaigners predict or will the UK emerge into the light of global trade unscathed as promised by Brexiteers?
As with most such events, the truth will lie somewhere in the middle. Even the most avid Brexiteer must harbour concerns that not having access to the single market could spell disaster. If the UK can avoid a prolonged recession driven by fear of and exacerbated by the reality of Brexit it will have done well and will have a platform on which to build for the future.
In much the same way as remainers were blasé over the possibility of leave winning the referendum, so the EU is providing a sanguine image over life without the UK. There is going to be a UK sized hole in the EU budget whenever Britain stops paying into the budget. There are rumblings from Germany about free movement and the admittance of additional “poor” nations.