Markets took their accustomed path after the Federal Reserve’s unexpectedly accommodative policy statement yesterday.
The dollar tumbled to its biggest two day loss since 2009, U.S. equities erased all of their 2016 losses, and West Texas Intermediate jumped almost 5 percent and topped $40 a barrel for the first time in three months. Risk assets in general had a field day.
The Fed was the fourth government institution, three central banks, the American, the European and the Japanese and the Chinese central government, in the past month to order that money must be kept flowing to the world’s markets. Between them they represent the four largest economic blocs in the world. They are the global economy.
The Bank of Japan initiated negative interest rates, the European Central Bank moved deeper into negative territory and expanded its securities purchases to the commercial market, the Fed declined to hike rates despite the U.S. economy having met its own inflation and employment criteria, and China created the largest new loan book for industrial development on record in January.
The Fed’s new rate projections suggest two quarter-point increases this year, down from four forecast in December. Norway cut rates on Thursday, Switzerland whose interest rates are already negative and the U.K. whose rates are not, left interest rates unchanged.
These central bank actions to stimulate growth are a continuation of policies stemming from the financial crisis. They are not new, they are more of the same.
The zero interest rate and quantitative easing policies of the world’s central banks have not succeeded in creating a sustainable economic expansion. Global economic growth is ebbing not gaining.
Governments may have fueled a sharp recovery in risk assets from equities to commodities following the almost $9 trillion collapse in stocks at the start of the year, but they have not altered the underlying economic dynamic of overdevelopment and under-consumption. Wealth creation in trading markets has not led to the creation of wealth in the real economy.
The year opening equity debacle was prompted by concerns that China was headed for a hard economic landing as Beijing attempts to rein in its vast industrial overdevelopment and promote a consumer rather than industrial economy.
The mainland economic background has not changed, even if Beijing has decided to ramp up the very industrial promotion policies that helped to bring it and the global economy to its current state.
The world's central bankers should be judged by their actions not their words, and their actions are not far from panic.
Chief Market Strategist
WorldWideMarkets Online Trading