Central Banks: Unchartered Territory
- Daniel Telele
- Feb 16, 2016
- 3 min read
January 2016 was fraught with volatility in international financial markets and global politics. Following the US Federal Reserve's December 2015 decision to hike rates by .25% after 7 years of near-0, Janet Yellen has been subject to significant criticism. After holding rates constant during the October 2015 meeting, citing a volatile international environment riddled with uncertainty; the December decision to raise was made to a very different narrative. Political leaders, analysts, economists, and bankers' confidence in the Central Bank seems to be diminishing. This lack of confidence is not reserved to the US. It has begun to spread globally. During a two-day congressional meeting, February 10-11, the House Financial Services Committee grilled the Fed chair for the for her recent decision. Although the market volatility is beyond the Fed's control, many analysts are predicting the next US recession as soon as Q2. Some analysts have pointed to decreasing trend in corporate tax revenues to defend this point, an essential metric.
The criticism has not been reseved to the US Central Bank, the Federal Reserve. Many of the worlds largest economies are holding near zero or negative rates. Some of the most watched banks are: The Federal Reserve (Janet Yellen), The Central Bank of Europe (Mario Draghi), The Bank of England (Mark Carney), The Bank of Japan (Haruhiko Kuroda), Swiss National Bank (Thomas Jordan), and Swedish National Bank (Stefan Ingves). Europe has been stagnating for the past several years, but slow signs of economic relief were witnessed in late 2015 (i.e. slowly declining unemployment). Further, concern over Brexit has sent further shocks through both European and British economies. In Sweden and Switzerland, leaders are also struggling to balance monetary and fiscal policy to improve sluggish growth without relief.
There is mounting concern over Central Banks’ place in the policy environment and their ability to correct markets. This is further complicated by the increasingly interdependent nature of global economic and financial market performance. As the following months unfold, changes in reserve rates, crude oil prices, Brexit, the US election, and the conflict in the Middle East will remain the largest anticipated influencers in the market. Advocates defending fiscal policy as a sustainable response say that the view on monetary policy must be reevaluated amid rising debt levels. The narrative of low and negative interest rates at such a large scale, in combination with the debt crisis and international volatility, provides an interesting case study. However, market performance forecasts for 2016 have remain modest, if not pessimistic.
RATES: 02 16 2016
The Federal Reserve Bank [.50%]
The Central Bank of Europe [.50%]
The Bank of England [.50%]
The Bank of Japan [-.10%]
Swiss National Bank [-.75%]
Swedish National Bank [-.50%]
Central Bank of Brazil [14.25%]
Central Bank of the Russian Federation [11%]
Reserve Bank of India [6.75%]
IMPACTS & RISKS
1. Low interest rates are put in place to stimulate the economy by increasing access to and decreasing cost of capital. However, when rates are low (specifically for such a long period as in the US), capital flows do not follow market demand. Inefficiently allocated resources slows growth and has a host of other global impacts.
2. Low rates also cut bank profitability. In combination with increased post-financial crisis regulation, many banks are facing budget shortfalls. Trimming unprofitable business areas is becoming a trend in the industry. Deutche Bank, Barclays, and even local banks are trimming thousands of jobs across Europe, Asia, and North America.
3. This global low-rate environment is a new phenomenon, an experiment. The outcomes and long-term effects are largely unknown by economists, leading to many heated debates.
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