1. Unconventional Monetary Policy, Interest Rates and Asset Prices
International Monetary Fund
November 15, 2018
Unconventional Monetary Policy, Interest Rates and Asset Prices
Cato Institute’s 36th Annual Monetary Conference
Tobias Adrian
Financial Counsellor and Director Monetary and Capital Markets Department

2. US Financial Conditions Are Unusually Easy
Last GFSR
has been offset by an easing in the US, despite policy rate hikes, …
Financial conditions in the US eased, despite policy rate hikes…
…which is in contrast with other areas
Financial Conditions and US Federal Funds Rate
US Financial Conditions Index and
Federal Funds Rate
(z-scores over and percent)
Financial Conditions Indices of Other Advanced and Emerging Market Economies
(z-scores over ) 1

3. The October Sell-Off Led to Lower Valuations
A sharp selloff in US stocks in October triggered a global stock market correction…
… leading to a significant fall in equity valuations
Major Stock Index Performance
(index to Jan 1, 2018; YTD change in parentheses)
12-month Forward Price-to-Earnings Ratio
(z-score since 1987; current value in parentheses) 2

4. US Equity Valuations Are Still Somewhat Stretched
…but remained somewhat elevated
Relative valuations have also come down...
US Equity Prices versus Model-based Fair Values (as of Oct-29)
US Equity Prices versus Model-based Fair Values (as of Oct-29) 3

5. Market Volatility is Still Relatively Low
…but remain compressed relative to model estimates
Residual Risk Premia for US Corporate Bonds
(Difference between the corporate spread and the default risk component; percent)
US Equity Volatility: Market Implied versus Model-Based Forecast
(Over different terms; percent) 4

6. Commodity Prices May Add to Volatility
Oil prices have recently dropped…
…adding to concerns about a slowdown in the global output
Brent Spot and Futures Prices
Commodities and Manufacturing 5

7. Loan issuance reached record highs in 2017…
Highly leveraged loan deals have grown as a share of new corporate issuance in the U.S. and Europe …
CLO formation and loan fund growth remains robust
New-Issue Global Leveraged Loan Volume
(Billions of US dollars)
U.S. and European Leveraged Loan Issuance by Debt-to-Earnings Multiple
(Percent of issuance)
US CLO Issuance and Bank Loan Fund Assets Under Management
(Billions of US dollars) 6