“We’re human, we make mistakes,” Fed chairman Jerome Powell said last month in what some are calling the biggest u-turn in recent decades.
“The Fed is stepping back from raising rates on autopilot and will likely continue to look at other metrics to inform Fed decisions, including inflation rates, U.S. market trajectory and global growth numbers,” said Robin Anderson, senior economist at Principal Global Investors.
After raising interest rates eight times in about two years, Powell kept saying there will be four more interest rate rises in 2019. Then it became three, two, and gradually it turned to just one. Now, some central banks are starting to cut interest rates.
“The Reserve Bank of India (RBI) reduced the key rate at which it lends to banks from 6.5% to 6.25% on Thursday, surprising most economists polled by Reuters and Bloomberg who had predicted rates would remain unchanged.
The RBI, now led by former finance ministry official Shaktikanta Das, cited a drop in inflation, lower oil prices and a global economic slowdown as factors behind its decision. Retail inflation in India fell to 2.2% between October and December, its lowest level in 18 months, while core inflation dipped to 5.6%,” so says CNN.
“Gilt yields dipped – meaning prices rose – after the Bank of England last week pulled back on its rate-rise plans, echoing more dovish noises from the US Federal Reserve. The BoE downgraded its economic outlook to its lowest level since the financial crisis a decade ago amid mounting uncertainty over Britain’s exit from the EU,” says FT.
“The economy isn’t in trouble, but let’s cut interest rates anyway,” an apparently disappointed commentator for Sydney’s Herald says after the central bank there suggested not only there will be no interest rate rises, but there may be cuts.
Can’t Stop Winning?
The US economy slowed down a bit last quarter, but growth is robust with employment numbers rising. At the same time, inflation is down to 1.9%, undercutting Powell’s main argument that interest rates have to rise to beat inflation.
Some suggest interest rates cause inflation as there appears to be a relationship between interest rates and the amount of money banks can create out of thin air.
With interest rates at 2.5%, they now stand above inflation. That appears to have caused some problems for house prices which are down in major cities.
“Mortgage application volume fell 2.5 percent last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was nearly 10 percent lower than a year ago,” CNBC says.
Mortgage borrowers now have to pay an interest rate of nearly 5%. Some of them would have started off at 2% or less, with Fed then more than doubling it in two years.
In addition, house prices have now reached unbearable multiples of average wages for most prospective homeowners. Meaning there are now less buyers.
It’s unclear whether that might cause Fed to perhaps even cut interest rates to maybe 2%, but Trump seems to have at least slowed them down after shouting last year that Fed had gone loco.