The world's central banks will follow the Federal Reserve's example

The US Federal Reserve – America's central bank – has said that it would become more tolerant of inflation and hold interest rates down. Others will follow.

The new era of global central banking is well and truly underway, says Howard Davies on Project Syndicate. Last month Jerome Powell, the chair of the US Federal Reserve, announced that the central bank would become more tolerant of inflation passing temporarily above the 2% target. Last week, the Fed held interest rates close to zero and signalled that they will stay there until the end of 2023. 

The new dovishness has been prompted by persistently low US inflation, which has undershot the target 63% of the time over the past decade. Where the Fed leads others will follow. The European Central Bank is currently conducting its own policy review. Some are keen for the Bank of England to follow, but matters are more complicated for the UK: thanks to the persistently weak pound, “average inflation has been more or less on target” in recent years.

Heading towards zero

The Bank of England’s monetary policy committee (MPC) held interest rates at 0.1% and continued the current quantitative easing programme at its most recent meeting. Minutes revealed that policymakers were briefed on plans to roll out negative interest rates in the future. Governor Andrew Bailey this week reiterated that the policy is “in the tool bag” but pushed back against suggestions that they will be brought in soon.

“Reading between the lines” it looks like the BoE will not be operationally ready to roll out negative rates until next spring, and then only if it wishes to do so, says Samuel Tombs of Pantheon Macroeconomics. In the meantime, policymakers will lean on more rounds of quantitative easing, which we expect to come around the new year. In the case of a no-deal Brexit, there will be even more quantitative easing and perhaps an interest rate cut to – “but not below” – zero.

MPC members will be studying the experience elsewhere in Europe, where negative interest rates are credited with arresting a deflationary spiral and boosting bank lending, says Tom Stevenson in The Daily Telegraph. Yet there is “scant evidence” that the policy increases economic activity and the effects on bank profits are dire. Beneath a certain level – known as the “reversal rate” – negative rates actually harm economic activity. 

Investors adhere to the maxim that you “don’t fight the Fed”, says Jon Sindreu in The Wall Street Journal. The idea is that easy money means stocks are bound to rise. Yet this year’s tide of easy money has not lifted all boats: tech stocks have soared, but some other sectors have slumped. Perhaps there’s a simpler investment prescription for the new monetary era, David Rosenberg of Rosenberg Research tells Barron’s. The Federal Reserve’s “promise to nail rates to the floor” amounts to a giant “‘buy gold’ advertisement”.

Recommended

When investors get over-excited, it’s time to worry – but we’re not there yet
Sponsored

When investors get over-excited, it’s time to worry – but we’re not there yet

When investors are pouring money into markets, it can be a warning sign of impending disaster, writes Max King. So how are fund flows looking right no…
26 Oct 2021
An investment trust that gives exposure to frontier markets
Investment trusts

An investment trust that gives exposure to frontier markets

An investment trust investing in small, illiquid emerging markets has disappointed, but deserves another chance, says Max King
26 Oct 2021
What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
How rising interest rates could hurt big tech stocks
Tech stocks

How rising interest rates could hurt big tech stocks

Low interest rates have helped the biggest companies to entrench their positions. But what if rates rise?
25 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021