Patterson: The Fed's Global 'Unintended Consequence'
Chief Investment Officer, Bessemer Trust
The week ahead sees policymakers from the Group of 20 – or 20 leading economies – meet in Moscow.
Over the last few decades, such an event would represent a "Super Bowl" of sorts for investors. Traders would listen intently to every comment, and parse every line of the final communique, to see which way the global macro winds were blowing, and position portfolios accordingly.
How the world has changed.
Thanks in large part to the extraordinary monetary policy undertaken by the Federal Reserve (note that the Fed's balance sheet hit the $3 trillion mark last month), policymakers around the world feel less compelled to get the blessing of U.S. officials before going down their own, increasingly unpaved, unmapped roads, taking financial markets along for a bumpy ride.
(Read More: No Wall Street Consensus on When & How QE Ends)
Japan is the latest case in point. On January 22, the Bank of Japan announced it would adopt a 2% inflation target and enact policy to try to achieve that target as soon as possible. Building expectations for this unprecedented course of action has led to a dramatic weakening of the yen. Indeed, the dollar gained 15% against the yen just between November and the end of January. The weaker yen, raising expectations that Japanese exporters would become more competitive, helped lift the Nikkei by some 25% over the same period. It also encouraged central bankers across emerging Asia to weaken their own currencies, so they could remain competitive vis-a-vis Japan.
Historically, Japanese officials would have been more cautious – after all, what would the U.S. think about such a currency debasement?
Japanese policymakers would have recalled memories of a bitter 1980s trade war with the U.S., triggered in part by a strong yen. Further, they would have sought to distinguish themselves from their Chinese peers, the latter constantly called to the mat by handfuls of U.S. politicians for manipulating local markets and having an unfair advantage due to the "cheap" renminbi.
Japan is far from alone.
In September 2011, the Swiss central bank reacted to massive capital inflows (in turn triggered by the Euro area crisis) by pegging its franc against the euro (at 1.20 francs per euro) in an attempt to limit currency strength and protect local exporters. The Swiss National Bank pledged to buy "unlimited quantities" of foreign currency to limit undue franc weakness. The SNB's balance sheet had already grown following currency intervention in 2009 and 2010, but reached a dramatic 70% of GDP in September 2011. The last time similar action was undertaken was the late 1970s, when there was a mass exodus from the U.S. dollar following the end of the Bretton Woods system. Interestingly, this was also a period where the U.S.' financial policy leadership was in question.
The Fed's ground-breaking policy steps during and after the 2008 crisis have left other leaders feeling less compelled to coordinate, and perhaps more compelled to "act first, seek forgiveness later," especially when it comes to forgiveness from the world's largest economy. This is not to say, by any stretch, that policymakers no longer talk with each other - of course they do. What they do not seem compelled to do anymore is attack financial challenges as a single, coordinated body.
(Read More: Signs of Recovery for Euro Zone, Optimism Builds)
The Plaza and Louvre accords of the 1980s, even the coordinated policy reactions after 9/11 and at the start of the 2008 crisis (in October of that year, seven central banks cut policy rates on the same day) seem unlikely to be repeated anytime soon.
Today, Group of Seven (G-7) and Group of 20 meetings are increasingly ignored by the investment community.
The "everyone for themselves" policy backdrop contrasts sharply to the increasingly interconnected global economy and financial markets, and raises some interesting questions for investors.
- What, for instance, might it mean if the unelected leader of the G-7 has lost some moral high ground in the policymaking arena?
- Is the era of global policy coordination over, or has it just paused during today's painful period of developed-market deleveraging?
- Will market volatility, in some asset-classes near record lows, inevitably rise as different countries pursue policies in their national interest instead of in the global economy's interest?
- On a more positive note, do less coordinated policy decisions help active managers? While not necessarily related, it is interesting that both equity and currency market correlations are receding. In fact, a recent Bloomberg article showed that correlation between nearly 2,100 companies in the FTSE All-World Developed Equity Index dropped 31% since last June, taking this particular indicator to its lowest level since 2007. That should be good news for active equity managers – less correlation and more dispersion suggests that fundamentals of particular companies can drive share prices relatively more.
Whatever the answers to these questions, at least one thing seems clear: the potential "unintended consequences" of the Federal Reserve's policy since 2008 go well beyond domestic inflation fears and risk-taking – they include what appears to be a structural shift in policy setting for the world.
Rebecca Patterson is the CIO of Bessemer Trust and has overall responsibility for investments, including asset allocation, strategic portfolio direction, and research. She is chairman of the Investment Policy and Strategy Committee and a member of the Management Committee. Patterson is also a CNBC contributor and you can watch her each week on CNBC's "Money In Motion."