The Great Monetary Tightening is over there
Many market participants stress that the Fed has just imposed an extremely rapid tightening in monetary and financial conditions. The given initiative has been already granted a title “the Great Monetary Tightening.”
While the Fed has raised its federal funds rate by up to 25 basis points, since May 2014 the so-called “shadow federal funds rate” has drastically tightened by approximately 300 basis points. The given move is considered to be far tighter compared to the 1994 cycle.
Some analysts thinks that this rapid tightening is the direct result of three essential things:
- The completion of the Fed’s asset purchases.
- The shortening of the Fed’s quantitative-easing program.
- The central bank’s forward guidance has switched from date dependent to data dependent.
The tightening of conditions has come up along with a 25% surge in the broad trade-weighted greenback, which though has quite obvious benefits, such as making American imports cheaper, has played a mean trick on multinational US companies by simply making exports less affordable and by cutting overseas sales as they’re converted back to the evergreen buck.
Iconic American brands, including Johnson & Johnson, Ford, Walmart, Proctor & Gamble are among those to blame the stronger greenback for recent mediocre performance.