If you aren’t in the moment, you are either looking forward to uncertainty, or back to pain and regret. – Jim Carrey
With everyone being an expert on the Fed's monetary policy these days, we must cut the Fed some slack. Uncertainty is everywhere, and the Fed's decisions reflect it. Expect more to come.
The terms "challenges, fears, pressures, or uncertainties" in official Fed communications rose to a record level. The Fed has a lot to deal with – a yield curve inversion, negative yields, a slowdown in Europe, trade war with China, and a President unhappy with rates being so high.
One would expect some clarity from the brightest minds in monetary policy working at the Fed. So far, Powell is borrowing from the Greenspan’s 1998 playbook: three rate cuts of 25bps each.
What would help the Fed in the short term and lift some of the uncertainties on the table? We all know higher stock prices will make President Trump temper his tone at the Fed, so here’s what Bank of America Merrill Lynch Global Fund Manager Survey showed earlier this month on what would be most bullish for risk assets:
From bottom to top, the ECB restarts QE. Done.
In the September meeting, the ECB announced a new QE package, unlimited in duration: EUR20bn net purchases "for as long as necessary" and "until shortly before the first rate hike."
Brexit resolution still awaits. With October 31st just around the corner, this may happen too, sooner rather than later.
Fed already cut 25bp, and the third cut in the “Greenspan playbook” solves this point too.
If we add these three (ECB QE, Brexit resolution and anther Fed cut) and interpret the earlier survey again, we have a pretty good shot at a bullish risk on move.
Oh, and Germany and the Netherlands, the two countries running a large fiscal surplus, already committed to invest largely in infrastructure and green projects. China already does that, albeit at a bigger scale.
To sum up, the Fed’s uncertainties mostly relate to time. More precisely, timing.
Just like bringing inflation to target is a balancing act, the same happens when dealing with uncertainties. As most of the things bullish for risk-assets happened or will happen shortly, the Fed should have an easier time to respond to market pressures, as they will dissipate soon enough.
Or will they?
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