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FX MACROECONOMICS


is only reasonable, then, that as the balance sheet shrinks, many see it as


tightening. They point to the


drop in equities and the flattening yield curve as evidence of too aggressive tightening. In fact, until the very end of the year, Fed policy was easier than a simple Taylor Rule model would suggest.


Just like the Great D e p r es sio n d i s c o v e r e d c e n t r a l g o v er nmen t balance sheets, so too did the Great Financial Crisis discover central bank balance sheets. The effectiveness is still an open question. To the extent it worked, there appeared to be diminishing returns. There are also questions about how it worked. While we recognize investors who would otherwise buy the risk-free asset was either displaced or forced to accept a lower yield, we argue that the main channel was not the material impact of buying or holding, but the signaling impact. Officials were saying "we are doing this to ease


12 FX TRADER MAGAZINE January - March 2019 monetary conditions." Doesn't


much of it seem like a confidence game in the first place? Now as the Fed unwinds the purchases,


high levels of support. However, halfway through the four-year term, the manner of the withdrawal from Syria, Mattis resignation and trenchant letter gave a distinct impression that Trump's support within the party may have peaked.


EUROPE WEAKNESSES


The challenges that the US faces are serious. However, it seems


to be


Several EMU members, including Belgium, The


Netherlands, Finland, Portugal,


it says it is on "automatic pilot" and technical in nature. It is not a policy tool or signal.


With the Democrats securing a majority in House of Representatives and the ongoing investigation into Russia's attempt to influence the 2016 election, President Trump may feel more constrained domestically. Even though an outsider, the Republican Party embraced Trump with


Greece hold national elections in 2019 and


best positioned to cope with its domestic challenges and int ernational head w i nds, some of which it is precipitating.


Europe appears particularly fragile. The economy is past its cyclical peak, and deposit rates are at minus 40 bp. Forecasts for the first rate hike have been pushed out of 2019. The German yield curve is negative through seven years. Spain can borrow for three years at negative interest rates. Italy's three-month T-bill yield is below zero. The precipitous drop oil prices will dampen headline inflation, and this will bleed into the core rate.


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