Blame of Clones - Season One

How the coordinated actions of the world's central bankers are beginning to diverge.

My, how times have changed.  Following the financial crisis that started around 2007, global central banking actions were quite synchronous as nations tried to survive economic winter.  Wizards of monetary policy worked diligently to keep the world’s financial system from falling apart.  Firms were failing, banks experienced runs (I can recall seeing a line blocks long on my way to work), and experimental monetary intervention was all the rage.  During the following years, central banks exercised an abundance of caution, worried that not doing so would put the global economy back into an accelerating tailspin.  But that era has passed.

The strength of America’s growth in the current post-recession era (circa 2009) leads most developed nations, and our central bank’s actions demonstrate this.  Starting in December 2015, the Federal Reserve started raising rates (the first hike since July 2006) and is expected to hike two more times this year judging from prices for futures contracts.  Other central bankers do not have this luxury as the economies they represent haven’t fully slayed the Great Recession dragon, still suffer from the scorching nature of the downturn.

All three of the other major central banks still remain ultra-accommodative.  Across the pond, the Bank of England Base Rate is nailed to the floor with its most recent cut coming on the heels of Brexit in 2016.  Further east in Frankfurt, Germany, the European Central Bank still maintains negative rates for some of its tools.  Finally, in the Land of the Rising Sun, the Bank of Japan continues battling deflation, a most determined foe, with their own pervasively low interest rates.

Like nature, economics abhors a vacuum.  As America’s central bank policies begin differentiating themselves from the rest of the world, unintended consequences are likely to emerge almost out of thin air.  Changes in currency relationships are often the puff of smoke near wand-wielding central bankers.  For instance, currency depreciation can negate the effects of tariffs.  Also, bond vigilantes could disrupt bond markets, frontrunning central bank actions, thus limiting desired outcomes.

All central banks will continue readjusting their policies until they once again find themselves back in sync.  It is not a case of if, but a question of how long this disruptive period will last.  Atlas does not try to forecast but will continue our quest for an oracle each day.