I have often said that after a meeting of the ECB’s board or the Fed's interest rate committee (FOMC), one sentence that is barely noticed, turns out to be extremely important. Jerome Powell, Chairman of the Fed, among other things, disagrees with the idea that "we have reached the Fed's inflation target of 2 percent in any convincing way."
According to all written and unwritten monetary rules, higher interest rates should be necessary. If the Fed Chair argues, however, that the inflation target has not been reached in a convincing way, then this means – freely translated – that monetary policy must be loosened. The rule of thumb is after all: expansionary policy leads to higher inflation and tighter monetary policy pushes down the rate of inflation.
The interest rate committee of the Fed decided, therefore, not only to keep official rates unchanged, but also to change its plan for the remainder of the year. Whereas the committee expected two more rate hikes this year in December – something that I, just like the promise made in early 2018 to raise rates four times in 2019, labeled as wishful thinking – the new promise for this year is to have zero rate hikes. In 2020 the central bank will raise rates just once. Just as the beginning of 2018 and the earlier mentioned four promised rate hikes in 2019, I would categorize the promise for 2020 as wishful thinking as well.
This as a result of all adopted and to-be-adopted measures, not least looser central bank monetary policy. Talking about monetary policy: the Fed also decided to slow the pace of winding down quantitative easing and thus end it in September this year. That is quite a considerable economic stimulus for the US economy in the coming months and quarters.
But all those measures that I mentioned, are measures that are essentially brought forward from 2020 to 2019. As a result, I suspect that growth for 2020 will be considerably lower than what the Fed is currently expecting. A recession in 2020 should not be ruled out. And that is not an environment in which the Fed will raise rates, but rather lower rates.
However foreign central banks may differ, what they have in common is a shared desire to not overtake the Fed. This would cause their currencies to appreciate, something that is viewed as unwanted in many countries, since it harms exports and pushes down the more often than not too low inflation. Since the Fed is currently hitting on the monetary breaks and beginning to put monetary policy in reverse gear, its subsidiaries will probably follow suit.
Expect the ECB, for example, to kick the can further down the road with regard to a long-awaited rate hike and that there will be increasing speculation about restarting quantitative easing. In other words: expect low interest rates to persist for the foreseeable future in the euro countries. Also expect that monetary policy in emerging markets will become looser. All in all, the worldwide monetary conga line that I mentioned recently, has now become a fact.