Exactly 10 years on from the day that BNP Paribas blocked investors from withdrawing money from three of its funds, the actions of the Federal Reserve are again being studied by investors with acute interest.
Among them, is Jupiter’s Chatfeild-Roberts, who holds the contrarian view that the global financial crisis began back in February 2007 when HSBC had to write down a huge sum on its Republic Bank over some bad US mortgages.
The real important question, said Chatfeild-Roberts, is whether the Fed will initiate quantitative tightening (QT) and if so, what will be the effects on markets?
America’s central bank has recently indicated it is thinking about changing tact, reverting from an ultra loose monetary policy to a tighter regime.
One of the first steps in this tightening process would see the central bank not reinvesting money it receives after the bonds it owns come to maturity, Chatfeild-Roberts explained.
In theory, the central bank would not reinvest in incremental amounts; $10bn in the first month, followed by $20bn in the second month, and so on.
If the Fed’s reinvestment programme goes according to plan, this “significant tightening” could bring the Fed’s $4.5trn balance sheet back down to $1trn by 2023 and could equate to 75 basis points of actual tightening within the next year, he said.
But he also thinks it is a possibility that central bankers will be unable to cope with a 20% fall in the market and implement more quantitative easing or stop tightening altogether.
“At one level, you’ve definitely got a central bank that wants to normalise,” he said.
“But the question is what is the market reaction going to be to that tightening and can the Fed cope with that?
“I don’t know, but one suspects they might not be able to. But one also suspects that they’re going to have a go at it.”
Tightening from the Fed would be good news for risk assets, which he thinks would become cheaper.
“Even allowing for President Trump and North Korea you would think that perhaps things ought to get a bit cheaper.”
Though there has been a great deal of discussion about the convergence of monetary policy toward normalisation across central banks, Chatfeild-Roberts reiterated that the Fed is the one to watch.
“They were the first people to do QE intellectually,” he said.
“They’ve been leading it and everyone else has been following. I have all eyes on the Fed myself.”