Global central banks are not short on confidence. That is the message this week from releases by the US Federal Reserve and the Bank of England. With both countries mired in political mud and economic data softening as it does later in a cycle, each governing bank spoke with a more hawkish tone. It was expected for the Federal Reserve to raise rates this week by 0.25% for the second time this year.
However, the market has started to discount its earlier expectation of three total hikes in 2017 as inflation data has turned over. Instead, Chairwoman Janet Yellen made comments that indicated that her group of policy makers are looking past the downtick in inflation which they see as transitory to a stronger labor market pushing it back towards their 2% goal. In addition, more details were released regarding the roll-off caps as they shrink the Fed balance sheet.
Though the Bank of England decided on no action, they surprised the market in the details of the vote showing 3 Monetary Policy Committee (MPC) members seeking to raise rates. That surprised UK economists looking at a backdrop of slowing growth, falling wages, and even less clarity on Brexit if that could be imagined. The British pound rallied a bit and the UK equity market (FTSE 100) fell as would be expected given the sizeable amount of non-UK related sales amongst companies in the index.
In all of this, we are mindful of the old saying that economic expansions do not die of old age. Instead, it is often thought they are killed by central banks. It is important that central banks (which try to act as a stabilizing force during the economic cycle) must recharge their more traditional tools such as interest rates, but not at the cost of sacrificing the recovery they went to extraordinary measures to manufacture.