US Federal Reserve policymakers met this week to decide what to do about monetary policy, given the elevated risks of slowing global growth and trade wars.
Jay Powell used an old proverb to deliver their verdict, “An ounce of prevention is worth more than a pound of cure.”
Whether the central bank will proactively pre-empt monetary easing to keep the US economy in good health, or whether they will wait until all the information is in before their 31 July meeting (including the G20 summit) is still unclear. What is clear is that the Fed is paying close attention to what the market is telling them - they are listening. This is much improved from their attempt last year to force the market, which completely backfired.
As investors concerned about the impact of monetary policy decisions on markets and portfolios, the Multi-Asset team has been watching these developments closely.
Our latest research looks at a typical signal of recession – the yield curve inversion – which has appeared twice this year, leading markets to speculate whether the countdown to recession has begun.
In line with Jay Powell’s latest stance of ‘prevention as a cure’ for economic health, our research shows how the Fed should look at such signals to better understand what the market is thinking. In doing so, the Fed could proactively prevent a potential recession through applying the right level of monetary policy easing (and at the right time).
We explore how central banks can do this in our thought paper, which we launch today titled, “Yield curve inversion: therapy for central banks?”.
That the Fed and we are using medical analogies quite by coincidence is perhaps the most telling sign that the health of the economy is being questioned.
Past performance is not a reliable indicator of future results and all investments carry the risk of capital loss.