Before the financial crisis, information about global central bank meetings was of moderate interest and included some basic news and research reporting on the event and its ramifications. But, since then, with historically low inflation and restrained economic growth, events have led to reduced interest rates and quantitative easing programs across the globe.
Today, the outcome of central bank meetings and the words used in policy speeches, testimony and lengthy economic digests have become breaking news, and are followed closely by all.
In January, the European Central Bank (ECB) and the Bank of Japan (BOJ) left their rates unchanged, and they left their respective quantitative easing programs in place. In February, the U.S. Federal Reserve (Fed) and Bank of England (BoE) maintained their existing, low rate policy.
Most policy makers are awaiting a return to a more “normal” environment where they have the leeway to tighten or loosen monetary policy due to market observations. The major central banks have kept this low rate policy in place, and though each is anticipating a reawakening of inflation, it’s not clear how quickly rates will rise.
What’s the trend?
AlphaSense includes access to documents from a number of major central banks to make it easier to find what each institution is discussing and to aid in creating a better understanding of the policy rate decisions.
The search trend charts in AlphaSense show how mentions of rising interest rates have grown recently, particularly, following the U.S. presidential election.
But, it’s the divergence of outlooks between the U.S. and Europe that is particularly notable.
The Fed already started to reverse course when it raised rates in December of last year, indicating that it expected to make 3 more increases in 2017 and beyond. In mid-February, Federal Open Market Committee (FOMC) Chair, Janet Yellen, reiterated the committee’s hawkish stance to Congress, stating:
“… it expects the evolution of the economy to warrant further gradual increases in the federal funds rate to achieve and maintain its employment and inflation objectives. As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.” – Janet Yellen, Semiannual Monetary Policy Report to the Congress, February 14, 2017
Inflation is beginning to move with both manufacturing and consumer prices seeing meaningful upticks in January. In combination with tight labor markets, general inflation is likely to rise. Additional rate hikes are imminent, whether at the March meeting or soon thereafter.
Underlying financial and political risk continues to put pressure on the euro currency and Eurozone economy at large — be it anxiety around upcoming elections in Western Europe, the unclear ramifications of Brexit, the potential reawakening of Grexit or the Italian banking crisis. Many risks exist that put a damper on confidence with the only optimism coming from exports that benefit from a weaker currency. Inflation, while low, has begun to awaken these last few months, but is unlikely to move considerably.
In January, the Governing Council led by ECB President, Mario Draghi, decided to keep rates unchanged and maintain their form of quantitative easing in purchasing assets monthly:
“… continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time … the Governing Council confirmed that the Eurosystem will continue to make purchases under the asset purchase programme at the current monthly pace of €80 billion until the end of March 2017 and that, from April 2017, net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary.” — ECB Economic Bulletin, Feb 1, 2017
Given the considerable uncertainty and tepid inflation, negative real interest rates are likely to continue as monetary policy here will remain steady beyond 2017, until a sustainable inflation pickup occurs.
With U.S. GDP growth improving and the dollar near multi-year highs, the path of interest rate increases and inflation growth are becoming clearer in the U.S. in contrast to the opacity of Europe. Since the election, interest rates have moved considerably, impacting longer-dated treasury bond yields and mortgage rates by over 50 basis points — perhaps being a contributing force to the recent strong performance in equity markets.
In particular, an environment of rising interest rates is favorable to the financial sector. Across recent earnings call transcripts, companies have highlighted this point:
“… Higher rates is good for our business is absolutely true.” – Aegon, Feb 17, 2017
“One item that seems very clear is that interest rates will continue to rise in the U.S.” – S&P Global, Feb 7, 2017
“On interest rates, we still believe that odds are currently stacked heavily in favor of lower than usual interest rates in the U.S., for the medium term, if not longer. And that’s largely because of upwards of $50 trillion of savings in the world that needs to earn a return, and we shall remember that rates in many parts of the world continue to be very, very low.” – Brookfield Asset Management, February 9, 2017
In the U.S. post-election environment of increasing interest rates, and the potential for lower corporate and individual taxes, the focus will remain on understanding the ramifications of global central bank commentary.
With many other central banks still in the era of low interest rates and quantitative easing, FOMC will continue to monitor U.S. inflation, wages and employment, the paths of which remain uncertain. Using AlphaSense, it’s easy to monitor mentions of “interest rates” via email alerts on a saved search.