The Federal Reserve’s rate hike was telegraphed to the point of almost being a non-event, while the Bank of Japan’s unexpected September move showed how central bankers can still make an impact.
Speaking in the wake of the Federal Open Market Committee’s second rate rise in the past 12 months, which included a pledge for three successive raises, A-rated Rieder said monetary policy influence is waning.
‘In the US, this policy evolution isn’t necessarily surprising, coming as it does after the economy has achieved a nearly historic 4.6% unemployment rate, with more than 15 million people hired since 2010.
‘What was somewhat surprising was the moderately hawkish tilt in Committee members’ year-end projections for the fed funds rate in 2017,’ he said.
However, Rieder said the Bank of Japan’s decision on September 21 to move away from an emphasis on negative rates towards more targeted attempts at controlling the yield curve and achieving a 2% inflation goal showed greater impetus.
‘We would identify September 21 as just as critical a date of policy regime change,’ he said. ‘In our view, their intent is to modestly steepen the yield curve, helping to improve financial-sector profitability, which had suffered under the negative rate regime.’
Rieder added the most recent European Central Bank action – the ‘non-taper taper’ – represented a missed opportunity for the region’s central bank to enact greater policy.
‘Ultimately, we think these specific directives toward steepening yield curves, and seeking a more productive equilibrium between monetary and fiscal policies should be beneficial to financial transmission mechanisms and consequently to re-rating growth and inflation higher in these regions.’
Looking at central banks more widely, Rieder said most developed markets are now becoming aware of the limited upside created by ultra-low or negative interest rates.
‘The view that adequate and effective financial transmission is much, much, more important to the overall health of an economy, and particularly, to imbuing the system with higher levels of inflation is now coming into focus.’