Darrell Delamaide/Investing.com | Sep 16, 2019 14:22
The U.S. Federal Reserve is giving new meaning to “leading from behind” as it enables central banks around the world to cut their benchmark rates after it first reversed its own policy of raising rates.
More than 30 central banks have cut rates so far this year, and the Fed is expected to create more space for them to do so by cutting the Federal funds rate at least 0.25 percentage points this week, to the 1.75-2.00 range. It is the most concerted monetary accommodation cycle since the financial crisis a decade ago.
The expected Fed cut follows action by the European Central Bank last week to ease monetary policy, even though it has limited leeway to do so. The ECB reduced its bank deposit rate by 10 basis points further into negative territory, to minus 0.5. It also announced the relaunch of its asset purchase program, starting in November with €20 billion a month.
Central banks in Australia, Japan, Britain, Norway and Switzerland will also hold policy meetings this week and some of them are likely to cut rates. Australia has cut its rate already to a record low 1% but is likely to cut again this week. Turkey is something of a special case, but its central bank cut its benchmark rate by 325 basis points Friday to 16.5%, after a cut of 425 basis points in July.
Central banks are seeking to stimulate their slowing economies with monetary accommodation, but they are also under pressure to cut rates to remain competitive in what amounts to a currency war. Switzerland, for instance, which is already in negative territory, has watched the franc go to a two-year high against the euro in spite of intervention by the Swiss National Bank.
The Fed is less interested in competitive devaluatons than in finding the right balance for the U.S. economy. Opinion is sharply divided within the Federal Open Market Committee (FOMC) as to whether further cuts are necessary at this time given that the growth is continuing, unemployment is low, and inflation is jerking up to its 2% target.
But Fed Chair Jerome Powell and his colleagues on the board of governors seem determined to push through one more “insurance” cut—making sure monetary policy is buoyant enough to keep the economy bubbling along and not tip into recession.
In part, this is an acknowledgment that it read things wrong with its four quarter-point hikes last year. If there was a window for monetary tightening, it closed up pretty quickly.
Britain and Norway, for instance, would sooner raise rates than lower them, given their own situations with inflation and growth. The Bank of England will hold off because it has to keep its tools in place to cope with Brexit, currently scheduled for October 31.
Norges Bank said in June it would raise rates again in September following the 0.25 point hike then, but it has lately been backing off that statement.
The current downward spiral in benchmark rates creates momentum of its own. The trade war between the U.S. and China is dampening expectations for growth and leaving central banks little choice if they want to support the economy. It even creates pressure on the holdouts at the Fed to get on board with the easing policy.
Investors will be closely watching how Powell explains the action this week during Wedneday's post-decision, FOMC press conference, to see when another cut might be coming. Sentiment in the market has shifted as some of the chiefs at the regional Fed banks have expressed their opposition to further cuts—some with the argument that the Fed needs to keep some tools in case the U.S. does fall into recession.
So investors are backing off. Fed funds futures, which have been dovish, are suggesting the Fed will pause in October, with the possibility of another cut in December, but maybe not. There is even a small chance policymakers will sit pat at this week’s meeting and not deliver that quarter-point cut, but that is less likely as more central banks cut rates.
After all, even if you’re leading from behind, you have to set the pace.
Written By: Darrell Delamaide/Investing.com
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.
More content, faster quotes and charts, and a smoother experience is available only on the App.