Will Aggressive Central Bank Policy Finally Stoke Inflation?
The last seven days have busy ones for central bankers with all of the big three – Japan, Europe and the U.S. – holding meetings with resultant outlook revisions, and in the case of the European Central Bank (ECB), further policy change. The details are complex and nuanced, but in each case the policy makers lowered their respective forecast for economic activity while Japan and Europe have already embarked on negative interest rate policies, commonly referred as NIRP.
The take away from these meetings are one, don’t put too much stock in central bank projections; and two, none of the policy makers appear to have any real inclination to raise rates. Nonetheless, these shifts, particularly in the U.S., appear to have altered expectations for relative rate moves and in turn may result in a slowing or reversal in the dollar appreciation trend. Evidence of this could be reflected in the recent gains in gold and other commodities, both of which rose further following the Fed meeting.
If we are seeing a transition in the dollar strength trend, we think this could have implications for inflation expectations. Other data points, including the most recent CPI reading suggest this bears more watching. While central bankers don’t see inflation, theoretically the enormous amount of stimulus should eventually translate to higher inflation and the markets may be starting to show some early signs. A change in inflation expectations could translate into an improved outlook for long suffering commodities and emerging markets, but also an increase in currency volatility.
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