Institutional investors have been going back and forth about whether monetary policy will provide the tailwinds to markets it did last year or whether central banks are running out of steam.
Monetary policy decisions by the U.S. Federal Reserve, the European Central Bank and other developed market players did plenty to bolster markets in early 2019, says Salman Baig, multi-asset investment manager and senior vice-president at Unigestion.
The Fed cut interest rates three times during the course of the year and the ECB ramped up its asset buying. Overall, the majority of central banks that were looking to finally raise rates away from historic lows took their cues from the major players and backed off, he says.
The more tools that central banks use to help keep the global economy chugging along, the fewer will remain at their disposal, says Baig, noting there are other players with plenty of ammunition at the ready.
“It’s no surprise that when the Fed takes pretty significant action like that, other central banks follow. The interesting thing as we head into 2020 [is] we expect that phenomenon will gravitate to emerging market central banks. You already have at the beginning of this year [the People’s Bank of China] cutting their [reverse repurchase agreement] rate. And there’s a good chance you’ll have a broader easing of monetary policy within the emerging world.”
Rates at emerging market central banks are still relatively high, says Baig, so their traditional levers are still available to be pulled.
As well, a recession isn’t likely in the next few months, he adds, so it’s unlikely central banks will need to step up in a big way. “While we certainly question the ability of central banks to reverse a significant slowdown in the economy . . . we don’t think we’re at that point yet.”