The landscape of global monetary policy is changing. In late 2015 we had the Fed hiking, signalling more to come, the ECB holding back on fresh QE and even the BOJ, which has engaged in more easing than any other central bank in history, was sitting on its hands.

That tune has changed.

The BoJ moved to negative rates this week. The Fed didn’t hike and signalled that they aren’t going to hike in the short term. The ECB is making noises about expanding its QE programs. In this article we explore direction of monetary policy going forward and its implications for financial markets.

The Fed Was Dovish This Week

This week the FOMC statement was very clear about highlighting the risks stemming from the recent instability in global markets and widening of credit spreads, saying they are “closely monitoring” the future impact this will have on the economy. The Fed had stated previously that the risks to the economic outlook were “balanced” but they are now “assessing the implications” of recent developments “for the balance of risks to the outlook”. This is a step towards the Fed saying that the balance of risks are to the downside, even though they are not quite there yet. If the Fed sees the balance of risks to the downside then they will not increase interest rates.

Weakening economic data was acknowledged, a move away from previous statements that said that the economy was expanding “at a moderate pace”, and this weakening was confirmed by Friday’s softer GDP number. Yellen also noted spending and investment were increasing at “moderate” rather than “solid” rates, but did note that, “labor market conditions improved further” referring to the stronger NFP print in January. Strong employment data has been a theme of last two years. The Fed’s target there has been met, and therefore strong employment does not add pressure on the Fed to hike; it’s now all about inflation and financial conditions. The Fed pointed to disinflationary pressure directly, saying they expect it “to remain low in the near term, in part because of the further declines in energy prices”.