Fisher Investments Editorial Staff
Currencies, US Economy

Monetary Mantras

By, 10/29/2009

Story Highlights:

  • Global monetary policy has been semi-coordinated to date, but now some countries have begun raising central bank rates. 
  • "Exiting" stimulus won't be as coordinated as entering was—and that's okay.
  • Today's smattering of rate raises hardly equals a monetary sea change.
  • Because rates are still historically low, there's plenty of room for higher rates without sacrificing an easy stance overall.
  • We don't know when, but the Fed will reverse course and many will fret it's the end for stocks. History doesn't prove such fears true in the slightest.

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Never have we seen such global monetary policy cooperation as we've had lately. However, after months of central banks dropping and keeping rates historically low, some countries (Australia, Norway, and India for example) are beginning to tighten monetary policies—just a bit. It's hardly the end of the global monetary stimulus, but it is a sign that the stimulus "exit" won't be as coordinated as the entrance was—and that's okay.

 

Last fall's crisis required massive, coordinated action, and it got it—a common threat required common action.  But in recovery, expect central banks to act independently—as they should—addressing specific conditions within their borders. For example, emerging markets, led by China, are largely leading the recovery. China, who's projected to grow 8.5% this year, will have a different monetary policy from the US, who is just now returning to growth mode.

 

That said, the smattering of rate raises today hardly equals a monetary sea change. As far as the global economy goes, a 0.25% bump in Norway (for example) is a small move in a small country. And because rates are still historically low, there's plenty of room for "tightening" without sacrificing an easy stance overall. Policy won't be uniform or perfect (never is). But central banks have some wiggle room.

 

And the biggest economies' easy monetary posture isn't set to change any time soon. The Fed continues to insist monetary policy will remain accommodative for "an extended period." The Bank of England is expected to hold their central bank rate steady until at least mid-2010. The European Central Bank believes current policy is still "appropriate." Japan may experience a protracted bout of deflation making low rates a necessity—nothing new there. And though China, like India, has begun mildly reining in lending, it remains committed to accommodative monetary policy overall.

 

When does an "exit strategy" take full effect? We don't know. But we know for certain you'll hear chants of, "Don't Fight the Fed"—the old myth declaring when the Fed hikes rates, it's bad news for stocks. It's a silly saying and hardly supported by history. The Fed will tighten eventually, but barring a major monetary error, when that day comes, stocks don't have to fall nor the economy falter.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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