Time flies. It is only few months back when everyone thought the Federal Reserve was going to raise US interest rates again at their March meeting. Well, it was yesterday and they didn’t. Of course, by now everyone had accepted that it wasn’t going to happen anyway, the almost complete market meltdown caused by the 25bps hike in December proving to be deterrent enough. World markets have been super volatile since the start of the year, and there is enough going on in global economics and politics for the Fed to find excuses in external factors for postponing any further tightening – which is exactly what Janet Yellen did. No indication that she believes the US recovery itself is faltering: she continues to expect US economic expansion at a “moderate pace” and the labour market to improve. It is all so very predictable, but the big question is how long before they become too embarrassed and admit the truth: that the US is already in recession and that job growth is confined to low-paying and part-time jobs. Anyway, the Fed was unexpectedly dovish and the market implied probability of a June rate hike collapsed from 53% to 43% immediately after the announcement; watch it go lower from here.
The Bank of England then met this morning to make their rates decision, but here there was never any debate about the outcome: rates were kept on hold at the level where they have been since 2009. The economic background is actually similar to the US, the economy is showing moderate growth and an improving labour market. The truth is also similar to the US in that out in the real world things are not so rosy – indicators for services, construction and manufacturing are all falling – though probably a bit better than across the Atlantic. At least Mark Carney doesn’t have to come up with excuses for not raising rates, it was never on the cards anyway and with the Brexit poll looming on the horizon there are uncertainty enough for markets to expect rates to be on hold well in to 2017.
Rates everywhere are too low; they are perpetuating the huge economic problems across the world. The recession should be allowed to play out and malinvestments should be liquidated. But that of course is not how politicians and central bankers see it, and according to their Keynesian theories they will soon need to engage in further expansionary policies. For now, though, they are continuing to walk the tightrope between admitting the problems and avoiding making them worse.
Posted March 17, 2016