Welcome to the ‘Great Monetary Tightening’

Saturday, February 20, 2016
By Paul Martin

Jonathan Garber
BusinessInsider.com
Feb. 20, 2016

In a note to clients, Paul Mortimer-Lee and Bricklin Dwyer of BNP Paribas suggest the Fed has “delivered a very rapid tightening in financial and monetary conditions,” and have dubbed this the “Great Monetary Tightening.”

The duo says while the Janet Yellen-led Fed has increased its fed funds rate by only 25 basis points, the “shadow” fed funds rate, or “the rate that, using past relationships, would be consistent with the level and shape of rates seen in the rest of the curve” has actually tightened by more than 300 basis points since May 2014. BNP says this equates to more tightening than the 1994 cycle.

This so-called “very rapid” tightening of conditions was the result of three things, according to BNP:

The Fed tapering its quantitative easing program.

The completion of Fed asset purchases.

Switching the Fed’s forward guidance to data dependent from date dependent.

The tightening of conditions has been accompanied by a 25% rally in the broad trade-weighted dollar, which although does have it’s benefits like making US imports cheaper, has wreaked havoc for multinational American companies by making exports more expensive and by reducing overseas sales as they are converted back to dollars. Iconic US brands like Ford, Johnson & Johnson, Proctor & Gamble and Walmart are aong those to blame the strong dollar for recent poor performance.

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