June will be an important month when it comes to global monetary policy this year. A lot of attention is being focused on the U.S. Federal Reserve meeting on June 14, at which markets are strongly expecting to see a Fed Funds rate hike of 25 basis points.
But before we get there, we have a meeting of the European Central Bank on June 8. As happened for so many years with the Fed, no rate change is expected from the ECB. But there is an expectation that they will lay the groundwork for an eventual tapering of their asset purchases, which currently stand at €60 million per month.
You may remember the so-called “Taper Tantrum” of 2013 in the U.S. That was a time when money started flowing out of the bond market on expectations that the Fed would taper its asset purchases.
That seems like a long time ago – Ben Bernanke was Fed Chair at the time – and it is sobering to realize that the ECB is still at that stage in monetary policy. In fact, measured in U.S. dollars, the ECB's balance sheet of asset purchases surpassed the Fed's balance sheet a couple of weeks ago.
The Fed is making noise about reducing its balance sheet – possibly by the end of this year – while the ECB will continue to add asset purchases but taper that growth in 2018.
In terms of interest rates, the U.S. Fed is expected to raise rates two to three times by the end of 2018, while the ECB will not even begin digging out of negative rates until the last half of 2018.
It is easy to see how the ECB is replicating the Fed's monetary policy path, but with a lag time of a couple of years.
That said, it seems to be working. There is some interesting evidence that the ECB's liquidity measures are having the effect that has so long been hoped for. We have seen better European data in the last few months and European equities are up between 5 and10 percent this year.
My View: I am not a fan of extended easy monetary policy, as it distorts the capital markets. And frankly, central banks are not happy to engage these policies either. But sometimes economic situations call for them and they seem to be working for the ECB. Now, at least, they are moving on to the next stage of the process.
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