Market news | 21 August, 2018

Consequences of the monetary policy of the Federal Reserve

Alberto Villasán Investment and Markets Director

The rate hikes continue to affect the economies

Only a few months ago we commented on the process of increases in reference rates by the Federal Reserve of the United States and how this process can affect the economy and the financial markets. It may be interesting to return to the subject given the situation of some countries and the dynamics of the global economy in recent weeks.

The rational was that to the extent that the Federal Reserve raised rates, or what is the same: the return on assets without risk, global investors began to move their positions from less profitable investments, or with a binomial from less attractive risk profitability, to others where compensation adjusted for risk is perceived as superior.

That rationing explained the mini-crises that we have experienced in Argentina, Turkey, or even in Italy itself, and how investors have reduced their positions in these countries buying assets from the US Treasury.

…what it could endure for the next quarters…

To the extent that the Federal Reserve continues with its policy of monetary normalization, the anticipated effect could continue, applying the liquidity of the assets of the greater part of the world in favour of the assets of the United States Treasury.

This effect is not homogeneous and continuous over time, since the psychology of investors causes in the short term human emotions to prevail. It has originated an episode of sharp falls and subsequent partial recoveries and all kinds of news about these mini-crisis.

The majority of the public perceives these situations as isolated events caused by political or economic problems, while for us they are largely a consequence of the monetary policy of the Federal Reserve.

… if the Fed continues with its current policy.

Following this reasoning, it seems logical to think that one of the keys to predict the behaviour of financial markets in the coming years is to predict the performance of the Central Bank of the United States in the short and medium term.

In that sense, everything indicates that the current policies of monetary tightening and the rise in the price of money (or rates) could continue during the next months. The underlying reason is the Fed’s determination to continue with its monetary policy despite the fact that inflation and economic growth data in the United States would allow it to relax.

For that reason, we think that it makes some sense to think that we could see new episodes of volatility similar to those of past months. Situations before which we are prepared from BBVA Switzerland to take advantage of them and transform them into greater profitability in the portfolios of our customers.