Whilst August is traditionally a quiet month in markets with many participants on vacation, central bankers have been quite active in trying to guide markets to their way of thinking. In the U.S., San Francisco Federal Reserve President John Williams started his August 15th Economic Letter by stating that “the time has come to critically reassess prevailing policy frameworks and consider adjustments to handle new challenges, specifically those related to a low natural rate of interest”. That’s central banker code for saying “governments need to do more on the fiscal side and we need a new way to think about monetary policy”. Shortly afterwards the minutes of the July U.S. Fed meeting were published, showing a divided committee. Some members thought that the economy was sufficiently strong to weather a rate increase, others felt that they would prefer to wait for inflation to move higher before moving. Across in Europe, the minutes of the ECB’s July meeting showed that the fall-out from the Brexit vote in the UK “has thus far been less marked than many had anticipated”. Once again, the ECB noted that they stood ready to take whatever actions were necessary to reach their 2% inflation target, but repeated their mantra that Eurozone governments needed to help as well, preferably by enacting structural reforms. In the UK, speculation is mounting that the new Prime Minister Teresa May could announce a fiscal stimulus package that, along with the Bank of England’s (BoE) recent monetary stimulus measures, might help the UK economy weather the fall-out from the Brexit vote. Finally, in Japan, Prime Minister Shinzo Abe launched a new 4.6trn Japanese Yen (U.S. $45bn) stimulus package to boost a struggling Japanese economy. All this suggests that global governments are moving closer to acknowledging that central banks and Quantitative Easing (QE) programmes alone cannot solve the world’s problems. With long-term interest rates at historically low levels, it makes sense, in our opinion, to loosen the purse strings and boost fiscal spending, financed by issuing long-dated bonds (as Japan is considering doing). In the medium-term, this could lead to higher bond yields and steeper yield curves.
- My Tweets
About This Content
The views expressed here regarding market and economic trends are those of Investment Professionals, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of Pioneer. There is no guarantee that these trends will continue.
This material is not intended to replace the advice of a qualified attorney, tax advisor, investment professional or insurance agent. Before making any financial commitment regarding any issue discussed here, consult with the appropriate professional advisor.