Speak softly, and carry a big helicopter

October 9, 2014

Days like Wednesday are the ones that remind investors why the Federal Reserve is what it is, and how some believe the other world central banks cannot compete, even as some expect the European Central Bank and Bank of Japan (to an extent) to take up the slack the Fed will leave behind when it ends quantitative easing in the next weeks and prepares for its first interest-rate hike some time in the third quarter.

The odds on that hike, by the way, shifted late Wednesday after the Fed’s minutes showed there was concern about moving policy too quickly. It’s the pace of increases that worries the Fed, not the idea of doing it at all. The Fed is likely to push rates to about 50 basis points either in July or September (the market is betting on September now, the Fed is probably thinking July), but it’s important to keep in mind that the monetary policy committee is not going to then start doing the one-move-per-meeting thing they did in the last rate-hiking cycle back in the Pre-Cambrian Era.


Thursday will see a round robin of central banker speak: The ECB’s Mario Draghi delivers remarks on developments in Europe and global central banking and then takes part in a moderated discussion with Federal Reserve Vice Chairman Stanley Fischer, at the Brookings Institution. Separately, Bank of Japan Governor Haruhiko Kuroda spoke at the Economic Club of New York on Wednesday, and both central bankers would be forgiven for saying they’ve only got so much they can do to help everyone out here – even though Kuroda did say the BOJ has plenty of options if it wanted to ease policy further.

Draghi’s various “whatever it takes” promises just don’t carry the same weight as a big helicopter full of U.S. greenback, and Jens Nordvig of Nomura has the figures to prove it. He says in commentary that the markets are moving into the second stage of the dollar’s gains, one where markets will continue to see elevated levels of volatility because the ECB and BoJ aren’t going to be able to make up for the Fed’s largesse on the monetary front.

Overall, during its peak, the Fed was injecting about $85 billion in additional market liquidity every month, he writes, and even through the first three quarters of 2014, the average was around $36 billion. The ECB, he estimates, can shovel in about $10 billion to $20 billion through its purchases of asset-backed securities and covered bonds, and its overall injection of liquidity has been between 100-150 billion euros for the entirety of the year. So, that’s not going to replace the Fed on its low end.

The BOJ, meanwhile, can inject about $50 billion a month, but as it’s unclear about its intentions, “one could argue that we have more uncertainty about the pace of asset purchases looking just a few months ahead,” which doesn’t help people figure out where things are going.

As a result, Nordvig sees rates rising and volatility increasing. Well, rates have been pretty stubborn on that front – staying low as the dollar rallies, the price of oil dives, and expectations for inflation are reduced.

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