The confrontation of the doves

The confrontation of the doves
The confrontation of the doves
Share post:

The most important central bank in the world, i.e. the US Fed, made an announcement yesterday that attracted a large deal of attention from investors. The bank withdrew its assurance to remain “patient” before the Fed funds rate would be increased. This paved the way for a possible abandonment of the zero interest rate policy, if economic need be. The new formula goes like this: the Fed funds rate will be raised once the labour market has improved more and the FOMC is optimistic about inflation rising towards the medium-term target of two percent.

At the same time the chairperson of the FOMC, Janet Yellen, managed to dampen the market expectations for the future Fed funds rates. This was mainly achieved by the downward revision of the projections for the Fed funds rate by the central bank. The expected value of the estimates by the members of the FOMC for the Fed funds rate at the end of 2015 is now 0.63% (formerly 1.13%). The market prices in 0.44%.

The central bank’s premise hinges on the assumption that the US economy, at an unemployment rate lower than previously expected, can grow without an increase in inflation pressure (5.0-5.2% in contrast to the previously expected 5.2-5.5%). The February unemployment rate amounted to 5.5%.

The actions taken by the US central bank are motivated by the increase of the excessively low inflation and the support of the economy. This means the doves are in control rather than the hawks. The latter focus on the fight against inflation. This goes in tandem with keeping the own currency from appreciating too much. The US dollar has indeed appreciated considerably relative to other currencies in the past months. This dampens inflation and economic output. The monetary strategy is currently similar across numerous countries. The confrontation of the central banks is prolonged. Those currencies whose central banks are taking the most active steps harbour the biggest potential for depreciation. While the US Fed has kept the expectations of the future Fed funds rates low, the ECB has the upper hand in the long run. It will be engaging in a negative interest rate policy in the foreseeable future and thus massively expand the money supply.

The indications given by the US Fed of only cautious raises of the Fed funds rate maintain the US Treasury yields on low levels and keep a lid on the appreciation pressure on the US dollar. Ceteris paribus, this supports US equities and US dollar bonds issued by emerging countries.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site A summary of investor rights is available in German and English on the website as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Leave a comment Required fields are marked with *

Your email address will not be published. Required fields are marked *