How effective is Monetary policy?

The risk-off sentiment in financial markets over recent trading sessions has become of bigger concern to many central banks as they struggle to influence consumers and investors alike with their monetary easing measures.

The latest disappointment was seen in the Eurozone last week, as despite the lowering of interest rates to negative 0.4%, investors had little confidence in the ‘do whatever it takes’ approach announced by the ECB on 10 March. In fact, global central banks seem to be losing the power they once had through monetary policy in reviving economic growth. The success of the US Federal reserve in flooding the markets with liquidity after a number of quantitative easing packages of their own, following the 2008 meltdown, has since been replicated with mixed results, by the likes of China, Japan and the Eurozone.

Having said that, yesterday marked the largest monthly increase of funds into corporate bond ETF’s following the surprise announcement by the ECB earlier in the week that it would be adding non-financial corporate bonds to its quantitative easing extension package. Left to see now, whether such inflows can be sustained long term to justify renewed confidence in ECB policies.

Recent monetary easing policies worldwide have seen positive fluctuations in risky assets short-term, but the long term sentiment today is borderline bearish to buy and hold risky assets, given the vast range of political, geo-political and globalised risks continuing to affect financial markets.

The price of oil for one has been influencing the bulk of investor appetite for risk over the last few quarters. With the most recent rally in prices coming to a halt yesterday, fears of oversupply are yet again resurfacing given no solid fundamental facts. Given that the price of oil and equity markets have been studied to produce little to no correlation between the pair, the resulting risk-off approach year to date has seen sell-offs in equity markets across the board (namely Europe and Japan), incited mainly by investor perceptions of little to no confidence in a turnaround via central bank monetary easing policies alone. Having said this, risky assets have pared losses during March mainly on the back of an uptick in the price of oil, improved economic data in the US, whilst the likelihood of a sharp deterioration of the yuan from this point forth has diminished.

Investors’ focus will now shift onto the US Federal Reserve meeting today, whereby the probability of a rate hike as priced in by the markets as at yesterday stood at a low 2%. Given the mixed fundamentals of recent months, the US has experienced a significant improvement in employment data, confirmed by the substantial increase in Non-farm Payrolls for February by 72,000 individuals. The Fed is expected to keep a rate hike on hold for the time being, despite the good news, at least until further positive data, namely out of the labour market emerges, most notably wage growth numbers.

The US Fed is expected to no longer be basing its upcoming hiking decisions on the economic health of other global participants, hence a rate hike come the next Fed meeting in June is highly possible, given the continued trait of positive data in the US. This leaves global central banks with little options but to hope for renewed consumer confidence and an end in sight to the volatility wiping out potential recoveries. The oil crisis is a complementing factor to a bigger problem and that problem in my opinion is an approaching end to an effective monetary policy era.