It Takes Four to Tango

It Takes Four to Tango
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It Takes Four to Tango

A fourth member, the People’s Bank of China (PBOC), has joined the Major Central Bank Club and continues to shake things up. (See my earlier post on China’s decision to relax the yuan’s quasi-peg to the dollar.)

Mario Draghi, European Central Bank (ECB) president, was the first to react, in his press conference on 3 September. Then last Thursday the Federal Reserve said it had decided to wait before making the most awaited rate hike in modern central bank history. Finally, on Friday morning Benoît Coeuré, ECB executive board member, reminded the markets that Draghi had strongly indicated that the ECB is ready to extend QE.

The equilibrium that the Fed, the Bank of Japan (BOJ) and ECB had managed to achieve after implementing their respective QE programs has been disturbed by the PBOC claiming its independence. But one thing has become clear: The pace of the responses has gone from an elegant waltz to something more akin to a supercharged tango. Markets are confused and worried: Can central bankers keep step with their partners?

Since its big move, the PBOC has been surprisingly quiet and, if anything, the yuan is seemingly back in a steady alignment with the dollar. By delaying a rate hike, the Fed made the PBOC’s easing job easier but made the ECB and the BOJ’s task slightly tougher. While the ECB has been surprisingly proactive and ahead of the curve in its response to slower global growth – we may indeed have a new paradigm – the BOJ has kept its tone pretty intact and remained on the sidelines.

So how much more back and forth on the dance floor will we see?

One thing is relatively certain: All this easing, or less hawkish monetary policy, is positive for global growth and eventually will support risky assets down the road. Fixed income and especially credit could benefit. On the other hand, equities will need additional growth and earnings, which remains less certain at this juncture. It’s a goal, however, that the four members of the Major Central Bank Club are certainly working hard to choreograph.

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