Central Bankers remain divided on policy decisions
Concerns over whether to focus on economic activity or inflation when it comes to monetary policy are dividing central bankers and policy decisions. Last week, for the first time in over 30 years, there was dissent in the ranks at the Fed meeting on whether to cut or not to cut interest rates, as the committee in the end decided to leave rates where they are. Yesterday, the Bank of England decided to lower interest rates by 25 basis points, but as was the case with the Federal Reserve, the decision was not a unanimous one. In fact, it was 5 in favour, 4 against. The decision is made depending on which side of the fence you sit on: growth or inflation. Focus on growth and you favour a cut, focus on inflation and you want to leave rates where they are.
The leaders of the Labour Party were quick to celebrate the 5th cut in interest rates since they came to power, conveniently forgetting that the Bank of England is an independent body, and has been mainly reacting to a weakening economy. Andrew Bailey’s comments, post the meeting, warned that mounting inflation risks could delay further rate cuts.
Stock markets, having had an uneventful day yesterday, as investors seem to have dismissed the weak employment data, ongoing concerns about the potential tariff effects, and the summary firing of the head of a government department. The Vix fear index leapt on Friday by over 25%, and is now back to the lower levels it was at the start of last week. If nothing else, the events of last week did take some of the “G” out of greed. The weekly AAII investor survey, which only a few weeks ago recorded almost record optimism amongst the retail investors, painted a more sober picture this week. The CNN fear and greed indicator has moved from greed to neutral.
Earnings season is all but out of the way as almost 80% of the S&P 500 has reported earnings, with growth in earnings for this quarter overall comfortably beating expectations, once again, the tech sector being the main driver. Central bankers now have a month before having to decide once again what to do with interest rates. Trump will most likely sharpen up his short game, but that will not prevent him from making his views clear on any topic he so wishes. Yesterday, he called for the removal of the newly appointed chief executive of Intel. The economic reports will continue. Next week, it’s US inflation and UK employment that will be the focus.