Central Banks Take a Turn

At its first policy meeting of 2019, the U.S. Federal Reserve changed direction. After four rate increases in 2018, Chair Jerome Powell announced interest rates were on hold. Last week, banks in the United Kingdom, Australia, and India followed suit by either reducing rates or cautioning rate reductions were likely, reported Sam Fleming and Jamie Smyth of Financial Times.

The dovish tone of central banks owes much to slowing global growth. January’s International Monetary Fund World Economic Outlook lowered global growth estimates for 2019 and 2020. Changing expectations were fueled both by factors that slowed momentum in the second half of 2018 and by issues that pose a potential risk to continued economic growth. These included:

· The negative effects of higher tariffs

· New auto emission standards in Germany

· A slowdown in domestic demand in Italy

· Economic contraction in Turkey

· High levels of public and private debt

· Escalating trade tensions

· A no-deal British exit from the European Union

· A severe slowdown in China

These issues have had limited effect on the U.S. economy; however, global risks are affecting the performance of some U.S. companies. Financial Times explained:

“The U.S. domestic economy has continued to put in a robust performance, with the number of new jobs in January coming in well ahead of Wall Street expectations and wage growth running comfortably above inflation. But corporate giants in the S&P 500 index, which generate over a third of their earnings overseas, are sounding the alarm about faltering overseas demand in markets including China, where the government has been battling against a slowdown. Smaller U.S. firms are feeling the global chill as well.”

Randall Forsyth at Barron’s reported major U.S. benchmarks finished last week higher, while the yield on 10-year U.S. Treasuries hit a 13-month low. Outside the United States, some global stock markets moved lower.

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