Central Banks

Fed knows policy doesn't work anymore but it won't admit it: Strategist

What's the value of forward guidance?
Does hesitant Fed make sense?
Low chance of Fed raising rates ahead of US election: Pro
50/50 chance of Fed pushing up interest rates: Pro

The policies of global central banks received another bashing Thursday with a London-based investment strategist launching a stinging analysis of the U.S. Federal Reserve.

Minutes released late Wednesday from the Fed's latest policy meeting showed some voting Federal Reserve policymakers expected a further U.S. interest rate increase will be required soon, although there was a general agreement that more data are needed.

Nonetheless, Marino Valensise, head of multi-asset and income at Baring Asset Management, called the minutes "extremely boring" and said investors learnt nothing.

"They (the Fed) know that monetary policy is not effective anymore, and this is a broader conversation," he told CNBC Thursday.

"I think that the odds for anything happening (from the Fed) before the end of the year are extremely low ... Even if inflation reaches the 2 percent (target), which is possible if not probable, they will not even act at that stage. They will allow 2.1 (percent), 2.3 (percent) type of inflation rates to be in the market and only then address the problem."

Instead, Valensise said global investors were monitoring the moves of the Fed, which was in turn monitoring what global markets were doing. Thus, both were held in a deadlock until the end of the year, according to the strategist.

'Never going to admit it'

Janet Yellen
Andrew Harrer | Bloomberg | Getty Images

Since the global financial crash of 2008, central bank policy has focused on buying up bonds in large quantities and cutting interest rates to record lows. The Fed has since looked to unwind this policy and performed one rate hike at the end of 2015. But, a backlash from the investment community over the merits of monetary policy has once again come to the fore. Many now expect more fiscal planning by governments taking the strain, as seen by Japan earlier this month and hinted at by the U.K. finance minister.

"They (all central banks) know it's (monetary policy) not effective but no-one is going to tell us, they are never going to admit it. There are certain things central bankers cannot tell, there are certain things that central bankers cannot do," Valensise said.

He added that negative rates - employed by the likes of the Bank of Japan and the European Central Bank - had "destroyed" the banking business model and believed these lenders now cannot make any money.

Policy a 'dead duck'

Stephen Isaacs, the chairman of the investment committee at London-based alternative advisory firm Alvine Capital, told CNBC this month that monetary policy was a "dead duck" and investors should focus on a coming "fiscal reflationary trade".

The Basel-based Bank of International Settlements - known as the central bank of central banks - has been very critical of policy over the last few years and has hit out at quantitative easing (QE) programs. However, research for the Bank of England in 2012 did highlight some of the benefits.

In a report it said aggressive easing had supported spending and incomes, mitigating the adverse effects of the financial crisis of 2008 and subsequent recession. It added that without the loosening in monetary policy, it was likely that the economic downturn would have been far more severe. However, it did note that inequality had widened during that period.

"The benefits of loose monetary policy have not been shared equally across all individuals, however. Some individuals are likely to have been adversely affected by the direct effects of QE," the research said.

Related Tags