I didn’t write my usual blog after the Federal Reserve (Fed) meeting on September 21, as there was not a lot to write about. With the exception of the fact that there were three, rather than the typical two, Fed policymaker dissenters voting against keeping interest rates on hold and waiting for December for a possible increase, it was a pretty ho-hum affair.
That being said, while neither the Fed nor the Bank of Japan (BOJ), which also met last week, did much at their respective meetings, it was still a very important week for future central bank policymaking innovation. As has been the case for the last two decades, it is the BOJ that is blazing new ground. Since the BOJ, not the Fed, is the primary determinant of new central bank policies, what the BOJ says and does matters a lot.
While the BOJ has conceded that Quantitative Easing alone is not getting it to the land of 2% inflation, instead of giving up, it has doubled down by:
- Specifically targeting a 0% 10-year rate,
- Managing the entire yield curve,
- Committing to overshooting its 2% inflation target, and
- Continuing with asset purchases in the equity markets.
As has typically been the case, it is quite likely that after initial reluctance and a lot of hemming and hawing, other central banks―specifically the European Central Bank, and the Bank of England if Brexit pans out the way I expect over time―will be dragged down the same path.
Implications for Global Rates, Asset Prices
If my assertions are indeed correct, all of this has long-term implications for global rates. Instead of the Fed disrupting the calm in the global rates market, if the BOJ―and others with a bit of a lag―follows through, realized volatility in the rates markets will actually go down rather than up.
In turn, global financial asset prices are also likely to become even more stable. I know, it seems improbable that volatility could go any lower, but if Japanese government bond rates become less volatile, so will everything in the rest of the world.
Of course, there is a real probability that the Fed’s rate-raising enthusiasm continues and it actually raises rates in December. If that happens, rate and asset price volatility will rise in the short term and global equities correct some. However, for long-term investors, a correction would be another incredible Fed-induced buying opportunity, which will also cause the Fed to start backpedaling immediately thereafter.
In my view, lower rate volatility and increased asset price stability are coming to a portfolio near you next year, courtesy of global central banks.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value. Risks associated with rising interest rates are heightened given that rates in the U.S. are at or near historic lows. When interest rates rise, bond prices generally fall.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.