The end of easy mon­e­tary poli­cies

Kuwait Times - - BUSINESS - By Hay­der Taw­fik

It has been a cou­ple of years since the Fed­eral Re­serve hinted at the re­ver­sal of its easy mon­e­tary pol­icy. It did raised rates back in De­cem­ber of last year. Since then the fi­nan­cial mar­kets got used to the idea that the Fed­eral Re­serve will not be ag­gres­sive in tight­en­ing its mon­e­tary pol­icy. In­vestors have priced in a lot less mon­e­tary tight­en­ing than was sig­naled by the Fed­eral Re­serve for the fu­ture path of in­ter­est rates.

The sur­prise elec­tion of Don­ald Trump and the ag­gres­sive sell off in global bonds are likely to af­fect this di­ver­gence for two main rea­sons, and the mar­ket re­ac­tion will de­pend on which of the rea­sons will drive in­ter­est rates and the fi­nan­cial mar­kets.

Although the Fed­eral Re­serve had am­ple rea­sons to tighten mon­e­tary pol­icy but failed to do so. Con­tin­ues eco­nomic op­ti­mism at the Fed­eral Re­serve, at times led to re­peat down­ward re­vi­sions in growth pro­jec­tions. Also, the clear diver­sion in the opin­ions of some mem­bers of the Fed­eral Re­serve com­mit­tee, mar­ket par­tic­i­pants and the spillovers from in­ter­na­tional de­vel­op­ments and changes in the value of the dol­lar. Ini­tial mar­ket re­ac­tion to the re­sult of the US pres­i­den­tial elec­tion was the more cred­i­ble one. In­vestors have de­cided with their money rather than lis­ten to the Fed­eral Re­serve com­ments. The dif­fer­ence be­tween what the of­fi­cials say or fore­cast and the fi­nan­cial mar­ket fore­cast of fu­ture in­ter­est rates, could only be tested in the com­ing months.

Fu­ture re­fla­tion­ary

Eco­nomic en­vi­ron­ment mostly based on Don­ald Trump’s new eco­nomic poli­cies. This is some­thing the new pres­i­dent has to stick with or he would face vi­o­lent and mar­kets tur­bu­lence soon. In­vestors are an­tic­i­pat­ing new eco­nomic poli­cies that are go­ing to dou­ble US eco­nomic growth. Also, the size of bud­get that is tar­geted for in­fra­struc­ture spend­ing and cor­po­rate tax cuts.

Don­ald Trump’s softer tune and pro eco­nomic growth just af­ter win­ning the elec­tion has boosted mar­ket sen­ti­ment, lead­ing to a surge in stocks and set­ting a new record for the Dow Jones

In­dus­trial In­dex. In re­sponse, and even though it is still early days, some an­a­lysts al­ready are in­clined to re­vise up­ward their eco­nomic pro­jec­tions for the US, with ben­e­fi­cial spillover ef­fects for the global econ­omy. It all de­pends on how Don­ald Trump car­ries out his new poli­cies. High ex­pec­ta­tions of in­vestors may not be the only fac­tor lead­ing to the sell­off in bonds, rally in stocks and a surge in US dol­lar. Some of Don­ald Trump’s new eco­nomic ad­vi­sors have al­ready been ques­tion­ing the ef­fec­tive­ness of pro­longed cen­tral bank mon­e­tary stim­u­lus. These come af­ter some com­plaints were made dur­ing the pres­i­den­tial cam­paign about the in­de­pen­dence of the Fed­eral Re­serve and its chair­women Janet Yellen. The new US ad­min­is­tra­tion led by Don­ald Trump have to be very care­ful about any com­ments or move that might desta­bi­lize the work­ing of the Fed­eral Re­serve and its com­mit­tee.

Ques­tion­ing the in­de­pen­dence of the Fed­eral Re­serve might un­nerve in­vestors and could trig­ger mar­ket con­cern about the whole op­er­a­tion and poli­cies of the US cen­tral bank. Such con­cerns will not ben­e­fit the US econ­omy or the global fi­nan­cial mar­ket. Much higher bond yields would likely lead to weaker stocks and a global eco­nomic slow­down.

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