The European Central Bank (ECB) eased further last week, extending the timeframe of quantitative easing and pushing deposit rates even lower. Despite the aggressive easing, markets in Europe and the U.S. sold off at first and then calmed down as investors digested what was ultimately some very positive news. While the ECB has committed to easing policy through March 2017, the Federal Reserve is on the verge of tightening here at home. The November employment report provided further evidence of U.S. labor market improvement, putting the Fed on track to tighten policy at its December meeting. This rate hike has been well telegraphed and is expected by the market, with market-based odds of a hike approaching 90%. As the Fed raises rates, the divergences in global monetary policy will grow even starker. Despite the market’s initial reaction, this clear divergence in monetary policy highlights the need for investors to have a plan for addressing global monetary policy divergence; U.S. investors may want to look for investment opportunities overseas where asset prices might benefit from the easy money policies.
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