Central bankers remain dovish

Theresa May’s government looked a little shakier after her commons defeat, Angela Merkel continues to struggle to put a working government together and Donald Trump’s position remains shaky regarding the Russian investigation. Despite the lack of certainty of leadership in three of the largest economies in the world, stock and bond markets appear ambivalent. What remains front and centre is what central banks around the globe are doing with interest rates.

The Federal Reserve did raise interest rates as expected, taking the Fed funds rate to between 1.25 and 1.5%. The Federal Reserve dot path suggests they expect three more rate hikes next year. Janet Yellen also announced that the Federal Reserve had increased their forecasts for economic growth for the coming year. This increase in economic forecasts is largely based on the expected tax reforms, as forecasts expect it to boost the economy something between one half and one percent.

Considering the upgrade to growth and an anticipation employment rates will fall further, it may have surprised some that the statement from the Federal Reserve was not more hawkish. The Bank of England left interest rates unchanged, again as anticipated, voting 9-0 in favour to keep rates where they are. This is despite the small jump in inflation announced earlier in the week. The market is not anticipating another rate hike from the Bank until this time next year. Should economic growth pick up more than the modest current expectation it is possible that these expectations could be brought forward.

Lastly but not least, of the three major economies central bank meetings over the last 24 hours, the ECB also announced that they are leaving interest rates where they currently are. Despite the continued strength in the European economy, underpinned by Thursdays composite PMI data, Mario Draghi reiterated the ECB’s October message that asset purchases will continue through to September next year.

This has been a busy week for central bankers as they all rush to get there Christmas shopping done. No less than 20 meetings around the globe have taken place this week, with 12 taking place on Thursday. Amongst the other notable decisions came from the Swiss central bank, they to saw no reason to change monetary policy anytime soon. They still see no likelihood inflation will hit their 2% target in the near future.

So there it is liquidity remains in place, central bankers seem relaxed about inflation as does the bond market. Leading indicators continue to suggest continued economic in the coming months.

Posted on December 14, 2017 .