PA ANALYSIS: Is predictable monetary policy making asset allocation an easy game?

As news of healthy numbers in the United States today hardens expectation that the Federal Reserve will raise rates next month or very soon after, investors may be thinking everything is just as heavily advertised.

PA ANALYSIS: Is predictable monetary policy making asset allocation an easy game?


The age of central bank forward guidance appears to have bedded in very rapidly, with moves being strongly hinted at well in advance.

The reports from the US come just a day after Governor Mark Carney and co at the Bank of England went to great lengths to telegraph their plans for interest rates in Britain.    

The commentary from the Bank of England has consistently steered markets towards mid 2016 as the time for monetary action on these shores, and yesterday’s events merely cemented that consensus.

Investors can be assured that any significant change to  plans in the US or here will be flagged up long in advance of the moves, at least that will be the case for as long as Mark Carney and Janet Yellen are in charge.

Over in Europe, and also in Japan, monetary policy has become equally predictable for different reasons.

Both the European Central Bank and Bank of Japan are committed to large quantitative easing programmes which have some way to run yet, meaning rock bottom interest rates are going nowhere.

Most major economies also have clearly established inflation targets in the 2% area, so even without the regular stream of central banker press conferences investors can see pretty clearly how close we are to a rate rise at any given time.

Not only do we have visibility on the timing, the central banks have also made the size of the rise predictable. It is clear that the Fed and Bank of England will likley only put 25 basis points on the rate when they act, with 50 basis points being the most they would raise it in one move.

All this forewarning means that arguably, monetary policy for the next couple of years is already priced into equities, and large asset allocation shifts will therefore not be required in the near future.



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