The Future of Central Bank Monetary Policy

Future, Central Bank, Monetary Policies, FOMC, fx trader, forex

The markets were on tender hooks in the run up to September’s FOMC meeting where a large proportion of investors were bracing themselves for the first rate hike by the Federal Reserve since 2006 and even the first change in interest rates since 2008.  In the end it resulted in somewhat of an anti-climax as no action was taken and the press conference that followed had a considerably dovish tone to it, whilst at the same time giving inconsistent messages leaving various doors open that could lead to the commencement of monetary tightening as soon as October.

Naturally the press conference that followed caused the dollar to sell off, but also stocks declined as equity investors vented a degree of disappointment that one of the great uncertainties in the financial markets at the moment has not been eliminated.  That uncertainty remains today as investors are none the wiser as to whether the most important thing determining the Federal Reserve’s decision is the state of the US economy or external factors such as the slowdown in China.  It would seem that the Federal Reserve is reminding us that in order to be a proficient investor in today’s global economy one has to consider everything from domestic to international influences.

The ramifications of the Fed’s decision has not only a wide reaching impact on the financial markets but other central banks around the world will take note of their reluctance to move.  This will have been especially welcomed by those central banks that remain firmly in accommodative mode, many of which are in control of emerging market economies, but especially the European Central Bank (ECB). 

The divergence of such a move would have been significant since at this point in time it is only the US’s Federal Reserve and the UK’s Bank of England (BOE) that are close to commencing their monetary tightening cycle, which has been the case for some time now.  It still remains highly unlikely that the BOE will move before the Federal Reserve and when one of the key themes that emerged from September’s press conference was that of the risks posed by a Chinese slowdown, we could be in for a long wait before the first hike comes.