As the Federal Reserve’s quantitative easing program comes to an end this month, strong trends in U.S. economic growth will likely lead the Fed to raise interest rates, in keeping with its long-standing plans. Meanwhile, central banks in Europe and Asia will consider the opposite approach in response to lagging growth, and move to expand their easing programs in an effort to stimulate growth. Investors and advisors alike need to consider how these changing monetary policies may or may not affect the investing climate at home and abroad, so this month we highlight five thought leadership commentaries that explore this divide.
1. American Century: Global Economic Divergence – Co-CIOs G. David MacEwan and Victor Zhang outline the basic premise of economic divergence – that strengthening growth trends in the U.S. will lead it to raise interest rates and that weak or declining growth in Europe and Asia may lead central banks there to lower interest rates via additional easing policies. This new paradigm will affect macroeconomic and asset-specific investment opportunities in all global markets as investors try to adapt to changing opportunities and challenges.
2. Allianz: A Case of ‘Conscious Uncoupling’ – Kristina Hooper draws an allegory to recent celebrity news to explain how the U.S. and its foreign partners will gradually adjust to different monetary policies. In her view, economic divergence will be a slow and calculated progression of events because U.S. monetary planners need to be aware of how tightening in the U.S. might affect economic developments elsewhere, especially those countries that are simultaneously trying to loosen their own policies. However, this path is entirely contingent on the Federal Reserve meaningfully raising rates, which it very well might change its attitude about if the U.S. economy runs into trouble in the short term.
3. Hartford: No Market is an Island – Further explores the economic motives in the U.S., Europe, Japan and China for new approaches to monetary policy, which, again, in the former case points towards rate hikes and tightening and in the latter three cases will lead to more accommodative easing policies. In Hartford’s view, as presented by Strategists Nanette Jacobson and Evan Grace, the way that these changing monetary policies play off one another and influence markets worldwide will be the primary topic on most investors’ minds; a “new regime” to define investing in the coming years.
4. AllianceBernstein: ECB in No Hurry But Further Easing Still Likely – Examining Europe’s challenges in particular, Economists Darren Williams and Dennis Shen explore the less pressing (but still present) imperative that the European Central Bank enact new quantitative easing measures next year. In their estimation, the relatively weak Euro affords the European economy some flexibility in foreign trade, but the overall growth trend is not promising – even ECB President Mario Draghi admits that the economy is “fundamentally weak” – and more concerted policy will be required to right the ship and stave off deflation.
5. Franklin Templeton: Sticking to the Strategy: Preparing for Rising U.S. Interest Rates – In an interview with Franklin Templeton’s Sergio Guerrien, CIO Michael Hasenstab discusses how rising interest rates in the U.S. might affect monetary policies and fixed income investing opportunities in emerging market countries. The piece is part of a three-part series focusing on economic opportunities and successes in Chile, but which also focuses on the importance of central bank stress tests in Europe and Japan, as well as the potential impact of various political crises on emerging market growth.