Global Central Banks – Goldilocks or a Grimm Tale
The first quarter of 2019 has seen investment markets respond to the abrupt change in stance from the US Federal Reserve at the end of last year. In December the Federal Reserve waved its policy wand (in surrender?) and announced that it was putting its planned interest rate increases on hold.
There were many reasons for the change in direction. Investors were worried that further interest rate rises would drive the US economy into recession and this, together with concerns over the state of US China trade talks, led to a sharp fall in global stock markets. Markets responded quickly to the change of heart and investors appear reassured that the Goldilocks economy (not too hot, not too cold) would continue for the foreseeable future. In March the chair of the Federal Reserve confirmed that the US central bank would not be increasing interest rates in 2019 and was only expecting to increase rates once in 2020 (the current benchmark interest band of 2.25% to 2.5%). The Federal Reserve also indicated that it was looking to cease reducing its balance sheet by the end of September effectively removing another monetary tightening measure. Over the last year the central bank had been gradually reducing the size of its balance sheet by only reinvesting part of the maturity proceeds of bonds in its portfolio (The Fed’s balance sheet recently fell below $4 trillion for the first time since 2013).
The European Central Bank (ECB) had continued to buy European debt throughout 2018 but has adopted a more dovish approach since the start of the year. The revival of its “targeted long-term refinancing” (TLTRO) stimulus programme should provide some additional liquidity and financing to a Eurozone economy that has seen growth forecasts for the current year fall from 1.7% to 1.1%. The Bank of England has also confirmed that there were no plans to increase interest rates, reflecting continued uncertainty over the timing and nature of Brexit.
Further east, the Bank of Japan has continued to purchase shares and debt in the open market, but these actions have failed to generate any inflation and the Japanese stock market has fallen over the last year despite this active support. The Chinese authorities have also adopted a number of approaches to stimulate their economy to soften the impact of a slowing growth rate, and the effects of the ongoing trade dispute with America.
The reversal in the stance of the US authorities, and the belief that the US Federal Reserve (and other central banks) would step in to help investment markets if volatility returns, has led to a sharp rise in global equity markets. Global bond yields have also fallen on the belief that the next movement in interest rates is likely to be down rather than up.