Interest rates can have an extremely market-moving effect on global financial markets. The topic of rising interest rates has been a major subject of debate in the U.S. and elsewhere for some time now, and global central banks have already reversed course to begin easing again in recent months.
The question that many investors may now be asking, however, is what rates will do in 2020. Central banks, especially the U.S. Federal Reserve, have provided markets with some confusing and back and forth commentary that has not only failed to provide more clarity on the central banks’ plans, but has also added to market uncertainty. The U.S. for example, appears to be especially unclear about the path of rates going forward. Rates were going up, up, up. The global economy then slowed significantly, and rates were going down, down, down. The Fed’s most recent meeting left interest rates unchanged, and the outlook for 2020 could be uneventful.
Make no mistake, many of the powers that be want lower interest rates. President Donald Trump has made clear his opinions on the Fed and what it has done with interest rates, and Trump has never been shy about commenting on the subject. He has, in fact, bashed the Fed and its leadership on numerous occasions while stating that the central bank is putting and keeping the U.S. at a major disadvantage to other nations with easier monetary policies. Whether or not his comments have affected the Fed is another object of debate, although it appears that thus far, Fed Chief Jerome Powell has done his best to avoid letting politics or criticism get in the way of the Fed doing its job and fulfilling its mandate.
The U.S. Fed now finds itself in a difficult position. After keeping rates at ultra-low levels for a decade, the Fed began slowly raising rates in recent years as the economy continued to show improvement. That improvement began to slow, however, as the ongoing global trade war affected the economies of both the U.S. and China (the world’s first and second-largest economies). The Fed and other central banks saw reason to not only cease trying to normalize their monetary policies, but to start easing again. The U.S. Fed lowered its key Fed Funds rate at three out of the last four meetings it had, and further declines in rates could potentially be seen in the New Year.
The U.S. is not the only nation that has entered easing mode again. The ECB, or European Central Bank, has also recently cut rates and reinitiated quantitative easing, or QE. The central bank of Japan, the BOJ, has also recently discussed additional monetary easing, and the central bank has suggested that any action could be expanded beyond simply lowering interest rates.
The outlook for 2020 remains unclear and will likely stay muddy until more is known about a U.S./China trade agreement. The two nations recently signed a “phase 1” part of a deal, but it appears that significant hurdles remain standing in the way of a viable, long-term agreement. If a deal is made, rates could potentially stay stagnant or even rise during the next year. If a deal is not reached, however, the bias for key interest rates may be steady to lower.
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