Rates: US Fed, ECB Lead A “Race to the Bottom”

Today’s Fed statement and press conference by Fed Chair Powell combined with the recent comments by ECB’s Mario Draghi can only be described as a “dove-fest” as another round of easing is upon us. First off, both central banks see little evidence of inflation now or in their forecasts. Both see trade disputes as harmful to long term growth prospects. Yesterday, the ECB announced potential moves including rate cuts and/or quantitative easing. This caused global bond yields to fall, the German 10 year hit an all-time low of negative 0.32%. Other banks are following suit: India’s central bank (the RBI) has cut rates 3 times this year with another rate cut expected in August. These moves have global trade consequences (which seems to be a hot topic these days) as the rate cuts devalue the currencies of those countries. If the US dollar is “too strong” in comparison, our products become too expensive overseas. This ratchets up pressure on Powell to “fall in line” and keep the dollar “affordable”. The Fed today: “the case for somewhat more accommodative policy has strengthened” and seven of the committee members (of the 17) expect a 0.50% rate cut by the end of 2019. If the Fed doesn’t lower rates at next month’s meeting, it will roil markets as a cut is now “priced in” to treasuries and equities. Stay tuned By David R. Pascale, Jr. , Senior Vice President at George Smith Partners