“GLOBAL CENTRAL BANK” POLICIES ALSO ACCOMMODATIVE
This rule of thumb can also be expanded to include the monetary policies of all the major central banks’ policies in summation. Keep in mind that central bank policies are often coordinated and are not changed in a vacuum. Therefore, I would like to coin a new market axiom. “Don’t fight the Global Central Bank.” Of course, there is no such thing as the “Global Central Bank,” but if there was it would be keeping most key interest rates at or near historical lows and would be leaning toward even lower interest rates and expanded quantitative easing programs.
In response to a slowing global economy earlier this year, massive new stimulus programs were announced from major industrialized countries that include the U.S., the E.U., the U.K., Japan, Australia and Canada along with extremely accommodative monetary policies almost everywhere in the world. Interest rates remain very low globally and in many countries are at historic lows, including negative interest rates in parts of Europe and in Japan. Some investors are becoming so risk adverse that they are actually willing to pay to hold some debt obligations. And it appears that these negative yields could become even more negative, as additional stimulus is needed in Europe and Japan. Also, countries that have positive interest rates are lowering them to varying degrees or are in a frame of mind to do so.
FEDERAL RESERVE Federal Reserve officials at their policy meeting in September reinforced Federal Reserve Chairman Jerome Powell’s statement that they were not even “thinking about thinking about raising interest rates,” as the Federal Reserve pledged to keep interest rates near zero until 2023.
Underscoring the promise not to hike the fed funds rate any time soon is the Federal Reserve’s “average inflation targeting” policy that was formalized by Fed Chair Powell at the Kansas City Federal Reserve’s 44th Annual Economic Policy Symposium on August 27th and 28th. Mr. Powell called for a “robust updating” of Federal Reserve policy and signaled looser monetary policy for longer.
The central bank’s policy of “average inflation targeting,” means it will allow inflation levels to run “moderately” above the Fed’s 2.0% goal “for some time” following periods when the rate of inflation has run below that objective. Mr. Powell explained this new policy codified how the Federal Reserve had already been operating, allowing for inflation to go above its target rate. The Fed’s new policy suggests that the central bank will probably be very dovish for a very long time.
In addition, some analysts are now anticipating the Fed may extend the maturity of its monthly purchases of U.S. Treasuries at the December 16th Federal Open Market Committee meeting.
Chart 2: Federal Funds Target Rate
INTEREST RATES REMAIN VERY LOW GLOBALLY AND IN MANY COUNTRIES ARE AT HISTORIC LOWS.
Source: Chart from U.S. Fed Funds Rate Source:
Tradingeconomics.com, Federal Reserve - ©2020
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23 | ADMISI - The Ghost In The Machine | Q4 Edition
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