Weekly Economic Briefing

Transmission impossible?

27 September 2016

Global Overview

  • Central bankers' pursuit of inflation targets has pushed policy into previously unthinkable directions. However, the consequences of these actions are still being understood, with the negative side-effects increasingly apparent.
  • In setting the tone for global financial conditions the Fed’s policy choices are under intense scrutiny. The FOMC chose the more cautious path of action again last week but it needs to keep a watchful eye on financial stability issues.
  • European policymakers have sought to mitigate the costs of unconventional policy with changes in macroprudential policies and regulatory measures. However, alleviating the excessive burden on the monetary authorities through the provision of greater fiscal support is still required.
  • The Bank of Japan has shifted away from its monetary base target toward a yield curve target. While it is not yet ready to taper its purchases, the new regime does allow for greater flexibility based on incoming data.
  • Financial stability is a primary concern of emerging market policymakers but in a world of extreme policies it is increasingly difficult for them to prevent the risks around capital flows.
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US

The Federal Reserve’s caution when considering raising rates is due to the recognition that highly accommodative policy is still required to sustain growth and hold up asset prices.

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UK

The Bank of England has used its macroprudential tools to try and mitigate any unwanted side effects from ultra-loose monetary policy. However, it cannot avoid these entirely.

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Europe

The ECB has faced a great deal of criticism over its policy settings. The focus should not be on what the central bank is doing but on what other policymakers are not doing.

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Japan & Developed Asia

The Bank of Japan blinked first on the policy exhaustion front, dropping its balance sheet expansion target for a yield target. However, it has not yet thrown in the towel.

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Emerging Markets

Monetary easing has had a mixed impact across EM economies. Many countries are less vulnerable than they were during the taper tantrum but maintaining financial stability is a challenge.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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