Last week, markets had a free for all after central banks around the world committed to preventing the slowing global economy, but what now?
Federal Reserve Bank (FRB)
The US got the party started. They left rates unchanged, but revised key language in their post meeting press conference. The change in language gave indication that the FRB is likely to lower interest rates next month. Economic data over that period will bring clarity to the extent of this initial rate cut. Additionally, the US and China are to meet this coming week at the G20 summit. A negative outcome would likely prompt a .50% cut by the FRB.
European Central Bank (ECB)
Europe followed suit as ECB president Draghi announced no change this month. He did suggest that a cut could come next month if the economy continues to weaken. The announcement caused the € to fall against the $, which was not warmly received in the US.
Bank of Japan (BoJ)
Japan held the same stance as the ECB and the FRB. They maintained their montary ease at this meeting, saying that they did not see any reason to change their easy monetary stance.
Bank of England (BoE)
The UK was the lone hold out in an overall dovish week for major central banks. They gave indication that they see no need for a rate cut at this time. The stance would change really quick if a disorderly Brexit ends up being a reality.
Dovish central banks are logical given the softening economic environment. The risk they run though, is cutting rates and leaving economies vulnerable to a future recession. A dangerous game of weakening currencies could insue as every nation vies for more market share. Compounding the problem is a global economy that has increasingly become more fractured. The contagon of protectionism could exacerbate the issue.
Lastly with rates at 2.5%, how effective will a rate cut really be? The mortgage enviroment could benefit, but lower valued debt could see very little impact in a quarter percent rate drop.
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