Fed policy has entered a new phase - BBH

Analysts at BBH argue that Fed policy has entered a new phase and it is more confident in the resilience of the economy.

Key quotes:

"Fed will bring a new tool to bear in the normalization process later this year or early next year:  the balance sheet.  Meanwhile, the BOJ's Kuroda has confirmed what our contacts in Japan had hinted.  Asset purchases in Japan will continue for "some time." 

"We suspect the next move from the ECB (next week) may be to tweak the securities lending program which may help increase the ability of the ECB to continue is asset purchases.  The fact that core inflation is still stuck in the trough (0.6% after bottoming in 2015 at 0.5%) despite the various unorthodox policies.   By the time the ECB being raising their negative 40 bp deposit rate the Fed may have hiked rates 1-2 more times.  The Fed may begin reducing its balance sheet while the ECB and BOJ expand theirs."   

"The political situation is admittedly very fluid.  A trade war, perhaps precipitated by the border adjustment tax (BAT), or a currency war, spurred by attempts by President Trump to talk the dollar down, could diminish the role of divergence as a driver of the Obama-Trump dollar rally.  We don't think we are there yet.    The odds do not seem to favor Senate approval of BAT, and Treasury Secretary Mnuchin has been quick to do damage control of Trump's comments about the dollar."