An increasingly dovish Federal Reserve has lit the touch paper on a round of global monetary policy easing as central banks aim to counter the effects of President Donald Trump's trade war.
Fed Chair Jerome Powell said June 19 that the "case has strengthened" for lower rates as he kept the target rate unchanged at 2.25% to 2.5%. Federal Fund Futures are looking for a first cut as soon as July.
"Over the rest of the year, we expect cuts by 14 central banks, including multi-moves from the U.S. (50 basis points), China (50 bps), Brazil (100 bps) and Russia (75 bps)," said Ethan Harris, head of global economics research at Bank of America Merrill Lynch.
Many major economies are not waiting around for the Fed. Nine of the 37 central banks tracked by the Bank for International Settlements have already lowered rates in 2019, while just three — Argentina, the Czech Republic and Norway — have tightened policy. This marks a complete shift in direction from 2018, where stronger growth enabled 19 central banks to end the year with higher rates, whereas just five cut.
An intensifying trade conflict between the U.S. and China and Trump's willingness to use tariffs as a form of political coercion against adversaries and allies alike have begun to show up in economic data around the world.
Low inflation is also giving central banks the wiggle room to lower rates and support growth. The U.S. core PCE price index, the Fed's favorite measure of inflation, has been below the bank's 2% target since January and is predicted to have stayed at 1.6% in May, according to a Reuters poll.
In the past week alone, the Empire State Manufacturing Index posted its largest-ever drop, business expectations in Germany fell the most since July 2016 and Chinese industrial production showed the weakest growth since 2002. On June 7, the U.S. Bureau of Labor Statistics said that non-farm payrolls undershot the consensus estimate by more than 100,000 jobs in May.
Eurozone inflation has not been at the European Central Bank's target of close to, but below, 2% since November 2018 and was at 1.2% in May; the lowest since April 2018. Chinese inflation came in at 2.7% in May, and has not breached its 3% target since October 2013.
ECB President Mario Draghi hinted June 18 that the bank could resume its bond-buying program if inflation did not improve — comments that drew accusation of currency manipulation from Trump.
There was a spate of rate cuts in May, with the central banks of Iceland, Malaysia, New Zealand and the Philippines all lowering the cost of borrowing. The prospect of the Fed reversing policy with a cut — expected in July — will be a signal for others to follow, according to Daryl Liew, portfolio manager at REYL Singapore.
"If the Fed cuts it will allow Asians to cut as well. India already has been cutting, but this will loosen the pressure on all the Asian central banks," Liew said.
Still, some central banks are looking to tighten monetary policy.
Norges Bank, Norway's central bank, is expected to raise rates 25 basis points on June 20 to 1.25%, according to Win Thin, global head of currency strategy at Brown Brothers Harriman. "Even though May came in slightly lower than expected, Norges Bank has flagged a hike this month as likely followed by another hike before year-end."
The Argentine central bank has been on an extreme tightening regime as it bids to contain runaway inflation and a plummeting currency. Policy makers in Buenos Aires set an interest rate floor of 62.5% in April.
Much will depend on messaging from the Fed chair in the run up to its next rate decision July 31. Fed Funds futures point to three rate cuts this year, but the market may be pricing in too much easing, according to Eric Lascelles, chief economist at RBC Global Asset Management.
"That is not to say that rate cuts are impossible, but to a significant extent, financial markets are trying to push the Fed into a rate cut," he said.