Three central banks met this week. None of them took any action but we saw market reactions that were quite different.

  • Our own U.S. Federal Reserve was the most boring meeting of the week. There was no expectation for change, no change happened and there was virtually no market reaction. 
  • The Reserve Bank of New Zealand was expected to lower rates but it did not. That caused some reaction but in an admittedly small market.
  • Bank of Japan, however, was different. It really was the one central bank that the international financial community focused on. Expectations built up that the bank would be more aggressive in its monetary stimulus.  Specifically, the Bank of Japan was expected to cut rates further into negative territory from its current -0.1 percent. 

Monetary easing is supposed to be one of Prime Minister Shinzo Abe’s “Three Arrows” program to revive the country’s struggling economy. But if this is archery like we used to do at summer camp, the Bank of Japan is not just missing the target but missing the entire hay bale.

The Bank of Japan kept negative rates steady this week, and equity markets around the world – not just in Japan – fell in response. Officially, the central bank said it was holding back on monetary firepower to see how its first foray into negative rates, back in January, had affected the economy.  

Those of us who watch global markets closely couldn’t help but chuckle. Back in January, the yen initially fell by 2 percent and equities rose by 2 percent. Within two days, that all came unwound. 

Our View: While central banks still are key to determining the direction of interest rates, equities and exchange rates, their effectiveness is increasingly diminishing. Markets and investors have become progressively more pessimistic about the sole use of monetary policy to create growth. It is time for fiscal policy to play a role in strengthening the G7 economies. 

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