Scott Minerd, Global Chief Investment Officer, Guggenheim Partners
The Federal Reserve’s annual getaway in Jackson Hole is not usually considered a gathering of rock stars, but that’s exactly how the late August event unfolded. The hawks loosened up the crowd with their dark, foreboding lyrics. After that, the doves sweetened the mood, singing a far more melodic and happy tune. Then the event’s two biggest stars—Fed Chair Janet Yellen and European Central Bank President Mario Draghi—hit the stage amid the twin pyrotechnics of easy money and a vision of the future where every worker has a job, and the crowd went wild.
The biggest news was Dr. Draghi’s comments that the ECB may soon have no option but to join the United States and Japan in undertaking more aggressive accommodation through a quantitative easing program, taking up the slack as the Fed ends its asset purchases. “On the demand side, monetary policy can and should play a central role, which currently means an accommodative monetary policy for an extended period of time,” he said, before adding the kicker that the ECB will “stand ready to adjust our policy stance further.”
Reinforcing Dr. Draghi’s outlook was Monday’s dismal data out of Europe’s largest economy. According to Germany’s Federal Statistical Office, German GDP contracted 0.2 percent in the second quarter. As goes Germany, so goes the euro zone, where inflation has fallen to 0.3 percent (its lowest level in five years) and manufacturing is struggling.
It’s not just Europe that could add stimulus. Bank of Japan Governor Haruhiko Kuroda faces similar pressures as Japan’s economy has failed to rebound after a sales tax hike prompted the sharpest economic contraction since the start of 2011.
Back at home, we expect the Fed’s band will keep playing its merry tune for now. The voting members of the Federal Open Market Committee in 2015 will be even more dovish than the current committee. If there is a risk, it is that the Fed will keep monetary policy at a high level of accommodation for longer than previously anticipated.
Financial markets heard the sweet song of easy money from Jackson Hole loud and clear, sending equities up strongly while driving U.S. Treasuries’ prices higher and yields lower. The recent high of the New York Stock Exchange Advance-Decline Line supports this optimistic hypothesis, suggesting that stock prices will continue to reach new highs.
The world’s central banks will be doing whatever is necessary to keep their economies from falling into depression or any other economic malaise. So not to worry: From what we heard in Jackson Hole, the world is a beautiful place and the easy-money band won’t stop rocking.
FOMC Doves to Rule the Roost in 2015
With the labor market improving and after nearly six years of ultra-easy Federal Reserve policy, hawkish members of the FOMC have become increasingly vocal about the need to increase interest rates. However, while these hawks generate a lot of headlines, they are a minority among voting members, occupying just two of 10 spots. Next year, as the debate over rate hikes becomes more prominent, the annual rotation in voting FOMC members will further weaken the hawks and bolster the doves. This suggests that the risk lies with later rate increases, not earlier.
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Scott Minerd is Chairman of Investments and Global Chief Investment Officer at Guggenheim Partners