The past three weeks has proven that the Federal Reserve is gaining control of the US monetary policy outlook. Many traders have already stepped in line with the Federal Reserve officials based on their projected interest rate increases in a dot plot chart. This is a major change to what happened last year when the market called out the central bank for their four rate hike plans.
Interestingly the People’s Bank of China have also been in command of the policy and it’s not only the Federal Reserve for their 2017 outlook. In fact the Peoples Bank of China has driven up market rates to remove speculators, this resulted in them being accused of messing with the policy in 2015 and have since taken policy steps to tighten the money market rates as a result.
Officials are enjoying manoeuvrability room as central bankers continue to direct the markets when it comes to the policy agenda which is strengthening the global economic outlook. There is a major shift when looking at 2015 compared to 2016 when investors were left worried about the market which was appearing to be dictated by the bankers actions.
It was only a year ago when there was concerns that central banks had literally lost control, but this year they are providing to be in control of the market and growth is becoming firm around the world and the risk of deflation has dropped as a result. The difference is noticeable when it comes to the Federal Reserve, which only began in 2016 when it raised the benchmark four times.
This resulted in Futures traders giving a fourteen percent odds as an outcome and they were proven right, losing only a quarter point move. Then this year when Federal Reserve showed three hikes in their outlook, they were disbelieved by the market and minority odds were placed on a number of moves. But the probability is now sitting at fifty seven percent, which is a positive sign that they have control of the outlook.
What changed was the Federal Reserve policy makers predicting the chances of an increase in March, which would be completely unexpected. The effort to increase rate expectations was announced in a coordinated message on March 3, 2017 by Vice Chair, Stanley Fischer.
The Federal Reserve predictions are also being taken seriously when it comes to Treasury yields on a longer term. Policy makers have stabilised them through communication and an equilibrium which has resulted in the interest rate being lower than previously recorded, the lowering is of about three percent, which is another positive sign that the Federal Reserve has a command of the outcome for this year.
At the same time, the Peoples Bank of China have managed to push in favour of the world’s number two economy without major assistance from the capital controls, they have effectively eased any pressures being placed on the Yuan. Since 2016 they have been working to raise money market rates to support currency. They haven’t changed the lending rates in order to promote growth and have worked hard to reduce the risk of scaring markets.
Confidence isn’t with everyone and the European Central Bank is juggling both economic and political realities in managing nineteen nations currency zones, which has led to them being behind what the market has anticipated. This is believed to be due to them starting a change that has been easing into a policy for almost a decade and an era of tightening their belts.
The good news is that for now things are moving to central banks being policy makers and they are focusing on improving the world economy on a daily basis. This means that central banks are in an improved position with financial market reactions remaining calm.