The FED - The Last Central Bank To Turn Dovish?
Since the start of the year, we have seen nearly all major economies turn bearish, hinting at potential rate cuts or at least pausing on their current hiking path to assess the impacts previous hikes. EUR/AUD/NZD/JPY are just a few that have recently turned dovish on their central bank mandate, which is to achieve economic stability and inflation of 2% YoY.
This leads us nicely into the main gauge of what Central Banks look at when determining the short term interest rates of their economy. Inflation, arguably the most important aspect of a Central Banks mandate. To achieve consistent year over year growth of 2%. There are other factors that then Central Bank will monitor, but for the purpose of the article, we will focus on inflation.
So why is the Central Bank turning dovish and hinting at cutting rates in the future? Well, global growth has slowed and inflation has suffered as a result of this. When inflation is dropping or “cooling off” as some governors term it, this is seen as a negative for the economy and the Central Bank may need to use other monetary policy tools to offset the dip in inflation. Those “tools” can sometimes mean cutting interest rates to ease the pressure on the downbeat economy. Cutting interest rates are seen as a negative for that economy and currency, as the people within that economy need lower prices of goods so they can purchase them.
Currently, the USA has just come off the back of 4 rate hikes in 2018, a solid number of hikes for one calendar year. The inflation rate in America is 1.9% in March, floating nicely around their target for the year. The Central Bank is currently monitoring how inflation will react to the 4 hikes in 2018, if this has dipped and comes down to 1.5% or 1% then the FED could look to cut rates to offset the cost of higher prices on goods. Another key factor to consider is President Trump, a keen advocate for low-interest rates and a booming economy. Trump has put a lot of pressure on the FED and more specifically Chairman Jerome Powell, constant bashing of him via tweets has not put him on Trumps Christmas card list. Trump's constant criticism of the FED has put J. Powell is in a rather tricky spot, if he raises rates he puts his job further in jeopardy, and if he doesn’t raise, the market will take this as a concession to the President however, the FED should be independent of the President and his agenda....