Passing the Baton
Submitted by Atlas Indicators Investment Advisors on February 8th, 2019Relay races are exciting. You get the fastest runners from around the globe and wait for world records to be set. Of course, the most dangerous portion of the competition occurs during the handoff. If a smooth connection isn’t made, forget finishing the race, let alone contacting the folks from Guinness World Records.
While there aren’t any elite athletes involved, there is a bit of a handoff happening in the global economy. Monetary policy makers seem to be passing the baton from the European Central Bank (the ECB) back to America’s Federal Reserve (the Fed). An announcement was made in December indicating the ECB would end their quantitative easing. In other words, they would stop creating new money in order to purchase bonds from various markets in order to influence interest rates lower.
Shortly after the ECB’s announcement, the Fed implied its willingness to be the next runner in the race if it looks like our economy is losing steam. Market volatility rose during most of the final quarter last year as well as into the beginning of January. It was then that Federal Reserve Chairman Jerome Powell commented that he would not hesitate to slow down his monetary policy tightening if they determined it was becoming problematic.
Make no mistake, the handoff has not been completed. However, the Fed seems to have an open hand waiting for the ECB's baton if it is needed to keep this race going. They have already indicated a willingness to reduce the number of interest rate hikes in 2019 (the traditional monetary policy tool) and are now willing to reach deeper into their bag of tricks in an effort to minimize and possibly postpone the downside of the business cycle. Part of what makes a relay race so exciting is the speed, but this global version could be remembered by the length of its duration.