Invesco's Georgina Taylor and Oliver Collin: Global markets react to the Fed's decision whilst Europe is positioning itself for growth

Eugenia Jiménez
Invesco's Georgina Taylor and Oliver Collin: Global markets react to the Fed's decision whilst Europe is positioning itself for growth

Georgina Taylor, Invesco's multi-asset income manager, believes that there is an intensifying discussion globally surrounding the effectiveness of monetary policy and the need for more creative ways to stimulate growth and boost inflation expectations, including fiscal measures. And that central banks around the world find themselves in varying positions regarding the effectiveness of policy to date and the tools available to them going forward.

Taylor says: "For central banks around the world, the Fed's decision this week potentially refocuses them on their domestic policy decisions. Previously, they were more focused on balancing domestic policy changes with the overall global direction of policy stimulus - the feedback loop from decisions by the Federal Reserve has arguably impacted domestic policy decision making. This could cause increased divergence between countries in how they respond going forwards and how markets price in the effectiveness of those policy choices.

"Another interesting development is the Fed's review of inflation targeting which may allow them to tolerate a period of higher US inflation to provide more symmetry around their 2% inflation target over the medium term. This could open the door for other central banks to review current targets and discuss whether current monetary policy frameworks are fit for purpose.

"This is where a change at the helm at the ECB is critical in its timing. Lagarde's appointment could lead to more creative policy choices at the ECB, a fresh set of unbiased eyes to challenge European monetary policy, not wedded to one school of economic thought or a previous Central Bank role.  In particular, her focus on the need for a fiscal response, and her ability to bring leaders together, could see a shift in how fiscal spending plays a more prominent role going forward. This is a significant new development in driving Eurozone policy, growth and inflation dynamics and a change which may not yet be fully appreciated by financial markets."

Oliver Collin, European Equities Fund Manager, adds: "Draghi's effectiveness at implementing innovative and broad monetary tools has arguably allowed politicians across the region to remain fiscally absent for far longer than in normal cycles.

"This is the core to Lagarde's relevance: in the months preceding her appointment, we have noted her continued messaging about the need for fiscal response; something she advocated heavily in her previous role at the IMF.

"On a forward-looking basis, the coherent message seems to be, "Europe needs fiscal" and perhaps the ECB backstop is removed.

"Europe has a fresh central banker, with more of a political than economics background, with an apparent ideology towards fiscal yet with continuity of the monetary backdrop that will allow governments to fund the necessary spending cheaply - in many parts of Europe funding is negative and hence doesn't burden future generations in both real or nominal basis.

"Lastly, we think it's important to remember that the ECB isn't the only organization with a change in personnel. Europe has a new Commission with Ursula von der Leyen the new president-elect. Von der Leyen is a French speaking German national and was sponsored by Macron, not Germany.   Politics in Germany is increasingly complicated with the pending retirement of Angela Merkel and the rise of the Green Party at the same time the German economy faces the challenges of Global Trade, Automotive disruption, and Energy Transition.     

"Other Commission appointments are interesting too, picking up on two: Margrethe Vestager retains her anti-trust role plus expands the mandate to digital duties and becomes one of the Vice Presidents. Vestager has been vocal in her criticism of the US tech monopolies and the need to address the basis of the European competition rules having been vilified for blocking the Alstom & Siemens merger proposal. Paolo Gentiloni is the Italian appointment and has been given the Economy portfolio.  Gentilioni will be responsible for stability and growth - which makes his appointment from Italy relevant because, as we know, Italy advocates a fiscal approach to grow. He's also looking at the carbon border tax which means protecting EU industry whilst maintaining the EU environmental policy."

Eugenia Jiménez
Author spotlight

Eugenia Jiménez

Eugenia Jiménez speaks Spanish and is Iberia Correspondent for Investment Europe covering Spain & Portugal, as well as Italy.