The likelihood of the Federal Reserve slowing down or ending quantitative easing in the near future means rockier markets, particularly outside of the United States, according to an expert panel speaking at an investment conference in Toronto on Monday.
Financial systems are now dependent on intervening central banks, said Ray Carroll, managing partner and chief investment officer of Toronto-based Breton Hill Capital, and making that switch back to an “invisible hand” policy is very risky.
“What we’ve seen over the past two weeks in the market is just a hint of what will come down the road if the Fed makes a policy error and tries to pull itself out of the market too early,” he said.
Despite the risk, that shift is likely to happen soon because keeping an open-ended money printing policy can only hurt a central bank’s credibility, said Eric Bushell, chief investment officer, Signature Global Asset Management. in Toronto. Bushell predicts the Fed will start to lower it’s bond purchasing program within the next 12 months, and the process is likely to be difficult. “It’s been a 12 month kind of honeymoon with this policy that’s underpinning all assets,” he said, “and I think it’s going to be a lot choppier.”
A slowdown in the Fed’s bond purchasing could be particularly bad for the Canadian dollar, according to Christine Hughes, president, chief investment strategist, portfolio manager, at Toronto-based OtterWood Capital Management Inc. “I worry about Canada because we’re already slowing,” she said.
The Fed’s policies have actually been supportive of the Canadian housing market and economy, she said, but that will change if the Fed slows down or stops quantitative easing.
Similarly, Hughes expects Europe and Japan to also be hurt by a change in policy. The U.S. however will not be as affected, she said, because it’s economy is on an upward trajectory.