Central Banks Going Separate Ways

Interventionist monetary policy worldwide has been a weighty theme since 2008. With central banks now moving in different directions, Mr. Marshall looks at the market implications.

04.01.2017 - Giles D. Marshall, Vice President, Portfolio Manager

Central Banks Going Separate Ways

For financial markets, the length and magnitude of central bank interventionist monetary policy worldwide has been the defining characteristic of the post-2008 credit crisis period. From aggressive interest rate policies—including negative rates in Europe and Japan—to quantitative easing and forward guidance, central banks have been single-minded in their commitment to boosting asset prices while stabilizing household, financial sector and government balance sheets.

Given the lengthy period of intervention, the monetary policy cycle has lagged the economic cycle, muted though it has been. Specifically, interest rates in the United States, Europe and Japan have been consistently lower than nominal GDP growth. Investors have watched as this trend has effectively accelerated the capital markets cycle—see, for example, rising asset prices and, with that, rising valuations.