Central Banks Are Sticking By Their Low Interest Rates

Central Banks Are Sticking By Their Low Interest Rates

about 4 years ago3 mins

The chair of the US Federal Reserve (the Fed) made his regular trip to testify before the country’s government this week, bringing investors’ focus back onto the implications of globally low interest rates. You could say they’re stuck in – takes off sunglasses – limbo.

🕰️ Recap

  • The Fed left interest rates unchanged last month, and so did the Bank of England – though the latter acknowledged it might be forced to cut UK rates later this year
  • Earlier this month, China cut rates in order to stimulate its coronavirus-hit economy
  • And on Thursday, British bank Barclays warned that low global interest rates would make it harder to achieve this year’s targets

🔗 Connecting The Dots

Interest rates are the major tool central banks use to manage economic stability. A fast-growing economy typically encourages central banks to increase rates to discourage borrowing and spending, which should keep growth from overheating. On the other hand, an economy on a downward trend might benefit from lowered rates: cheaper borrowing – and the extra spending that usually promotes – should help to boost growth.

With US economic growth slowing down last year, the Fed did an about-turn on its policy of stable rates and chose instead to cut them. But some investors wondered if they’d been too hasty, given that the economy looked set to get a boost from progress on the US-China trade deal anyway. Still, considering the severity of the economic disruptions so far this year – namely US-Iran tensions and the still-spreading coronavirus – investors might be pleased the US and Europe lowered rates when they did.

Not that American or European central banks had much choice. In remarks to the US government this week, Fed chair Jerome Powell cautioned that further rate cuts wouldn’t be enough to turn things around in the event of a weakening US economy, and underscored how important “fiscal policy” (i.e. the government lowering taxes or increasing its spending) would therefore be. Powell’s sentiments echo those of the European Central Bank, which has called for individual countries to support their economies’ growth, rather than rely on the central bank to slash already record-low interest rates even lower.

🥡 Takeaways

Investors might be forgiven for getting complacent in the last few years. They’ve been led to believe central banks will do “whatever it takes” to cushion any losses they might suffer in the stock market, all in an effort to keep the longest-ever period of economic expansion going. Recent rate cuts won’t have changed their minds, and that might be why some analysts think now’s a good time to buy – despite stocks hitting fresh record highs this week and Greek bonds' yields hitting new lows.

Of course, there might come a time when it’ll be wiser to sell – perhaps if central bank support wavers or its effectiveness dwindles. So rather than wait for analysts – or even Finimize – to tell you when the jig is up, here’s an indicator you can keep an eye on. When the three-month moving average of US unemployment rate rises by 0.5% or more from its lowest point in the last year (i.e. when people fall out of work quickly), a recession’s almost sure to follow.

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Hot on the heels of 2018’s weed stock roller-coaster ride, investors are bracing for a new wave of psychedelic drug stocks coming to the market. Mind Medicine, a Canadian company undertaking clinical trials with psychedelics, intends to list in Canada in early March, likely kicking off a trend of companies creating clinical treatments from drugs like MDMA, LSD, and psilocybin (the active ingredient of magic mushrooms). Our analysts explain how to avoid becoming an acid casualty in the Finimize app.

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