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The Fed pauses, the ECB waits and sees

22 February 2019

At the start of this year, the Fed gave significant support to risk assets, which, in most cases, clawed back the November and December losses. Moreover, in a speech in early January, and again at the latest FOMC meeting, Jerome Powell said that the Fed would be flexible on balance sheet reduction, which is currently taking place at a pace of USD 50 billion per month.

The Fed has changed its tone from that employed in previous FOMC meetings due to uncertainty, and despite a slight tightening in financial conditions at the end of January. In its 30 January statement, the monetary policy committee described US economic activity as "solid" (and no longer as "strong"). It also said that it would be "patient" in determining its future monetary policy adjustments. An unexpected short-term pause in the inflation index monitored by the Fed (Core PCE) suggests there will be fresh monetary tightening later in the year.

The ECB Governing Council has decided to wait for the new economic forecasts in March before passing judgement on the persistence of the economic uncertainty weighing on eurozone activity, which now looks to be on a downward trend.

In this environment, which shows how difficult it is for the central banks to move on from their ultra-accommodative monetary policies, investors’ search for yield is still a live issue. Emerging asset classes, high yield credit, subordinated bank debt and long-maturity peripheral debt are among the most popular sources.
However, the search for yield is hampered by a number of risks, chief among which are the economic slowdown and political risks in the eurozone, along with the publication on 17 February of the US government’s recommendations for a wide-ranging trade agreement covering the automotive and agricultural sectors and a standardised treatment for incoming investment... Watch this space!

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