The world’s most powerful central bank, the Fed, has hiked rates nine times since 2015. After a policy of providing guidance, and sticking to it, the Fed abruptly turned dovish in December. Fed policy is one of the key drivers for markets globally, particularly given the backdrop of quantitative tightening, so this change of tune was a massive deal.
Goldman Sachs has halved the odds of a hike next quarter to 25%, however, Chris Watling from Longview Economics expects a more drastic response. He told us in an interview: “They talked about adjusting the balance sheet if they need to but, frankly, I think they probably need to cut. If I look at global M1 money supply, it's basically at recession levels.” Watch (or read on) to hear more from Chris on this tectonic shift in markets.
I think money got too tight last year. I always think the central banks were endogenous to the whole process and really they're looking at data that tends to be backward looking and really they should be forward looking. Markets are forward looking. The fed and the central banks tend to be backward looking. When you're looking at wage inflation and lead market data, that lags the cycle.
You should be looking at monetary metrics, how tight money is getting and I think with all those hikes into 2018 and the tightening of the balance sheet, you could see if you looked at something like a global M1 money supply measure, that money globally was really very tight and growing at the slowest way it had been growing since the GFC. Markets then reflected that. You had a bout of volatility and the fed thankfully adjusted its path from there on out.
I think the interesting question is where do we go from here? Because they said they were patient, they're on pause and they talked about adjusting the balance sheet if they need to but frankly, I think they probably need to cut.
If I look at global M1, it's basically at recession levels. It makes me quite nervous and I think we're probably not quite through this bout of volatility yet, and indeed I'm wondering whether bubbles have burst because money's been too tight.
Therefore, I think the fed needs to cut and I think another downdraught in markets will push them to do that.