What Happens When Central Banks Get Busy?

Global monetary-policy activity and uncertainty are likely to remain elevated, creating a difficult regime for equities and traditional bond diversification but a more favorable opportunity set for flexible macro strategies.

• GMO classifies months since December 1997 as passive when one or fewer of 11 central banks changed rates and active when more than one did; each regime represents 50% of observations.
• Equity returns averaged 124 basis points in passive months, versus 25 basis points when multiple rate increases occurred and 13 basis points when multiple cuts occurred.
• Global bonds performed worse in three of the four active-policy regimes, suggesting that bonds may not consistently hedge equity risk when central banks are moving frequently.
• Markets currently imply at least one 25-basis-point-equivalent rate increase by year-end in nine of the G10 economies plus India; implied next-12-month moves include +3.1 for Japan, +3.6 for New Zealand, and +2.8 for Canada.
• The San Francisco Fed's market-based monetary-policy uncertainty measure remains elevated relative to much of the past 15 years, while Bloomberg consensus expects roughly a dozen major-central-bank rate changes during 2027.

Takeaway: Investors should not assume that bonds will provide their usual diversification in an active and uncertain policy regime; GMO argues that long-short, cross-asset macro strategies may offer complementary returns, while acknowledging that the environment does not guarantee strong macro performance.