A global monetary easing cycle appears to be underway amid slowing world economies and U.S.–China trade risks. Central banks around the world have collectively cut interest rates 32 times already this year, bringing about a cumulative reduction of 13.85%, says the Bank for International Settlements (BIS). The BIS tracks 38 different central banks, according a detailed story in Bloomberg as outlined below.
But don’t expect the rate reductions to end soon. Trade tensions remain a stark threat to growth even as the U.S. and China just announced efforts to restart talks this fall. Interest-rate swap markets have been pricing in expectations of another 58 cuts over the next 12 months. That would mean an additional cumulative rate reduction of 16%, per Bloomberg.
The banks' goal is simple: to flood markets with liquidity to keep the global economy afloat. Together, the total of 90 rate cuts - both executed and planned - also would amount to a massive effort by central banks to prevent a recession and head off the kind of crisis that threatened the world economy in 2008.
- Central banks have cut rates 32 times this year, a cumulative reduction of 13.85%.
- Interest-rate swap markets have been expecting 58 more rate cuts in next 12 months.
- Markets place 90% probability on Fed cutting rates by 0.25% in September.
- Trade war tensions have escalated and global growth continues to weaken.
What it Means for Investors
The U.S. Federal Reserve, issuer of the world’s reserve currency, is no exception, though its steps have been measured. Markets are expecting the Fed to cut rates by 25 basis points at its upcoming policy meeting on Sept. 17-18. The CME Group indicates that investors are placing a 90% probability that the Fed cuts by 0.25% and a 10% probability on a 0.50% cut, according to the Wall Street Journal.
Despite market expectations, some Fed officials are not nearly as dovish. They say that the decade-long expansion of the U.S. economy can continue at a modest pace and inflation will eventually rise to the 2% target. Some even expressed disagreement with Fed Chair Jerome Powell’s decision to cut rates back in July, according to the Journal, a move that Powell stressed was just a short-term adjustment and not necessarily the beginning of an easing cycle.
Powell’s July rate decision was motivated by signs of weakening global growth, continuing trade uncertainty and muted inflation. Trade tensions and signs of global economic weakness have only escalated since then. Tariffs have increased and global manufacturing continues to slow, even contracting in some economies.
To be sure, the actual commencement of trade talks between the U.S. and China - and a possible new trade agreement after that - could bolster the markets and slow the global economy's slowdown. But U.S. and Chinese negotiators already have broken off talks more than once. If that happens, a continuing trade war could push the U.S. and global economies towards the brink of a recession. And that could force central banks to continue to cut rates, which may be too little, too late.