Central Bankers Sit on Their Hands Before the Election

Last week the Federal Reserve and the Bank of England (BOE) sat on their hands and made no policy changes at scheduled meetings, and the European Central Bank (ECB) is already in the armchair after their late October meeting. Who would want to act before the U.S. presidential election? We all saw the surprise result of the Brexit vote, and who really knows who will win, or if the election will be contested and by whom, or even if the election results will be thrown to the courts, like in the 2000 elections – remember the hanging chad? 

Provided nothing really strange happens in the election, the Fed has tipped its hat it will raise rates in the December meeting, to be held on the 13-14th. The economic data is good enough – witness the strong 3Q GDP results and the recent above consensus wage growth numbers—and the market is forecasting a rate hike with some pretty high odds. No drama here, and a small hike still leaves Fed policy accommodating and supportive of higher growth and inflation. 

The Bank of England is still smarting from its wrong-footed call regarding a fast and severe economic slowdown after the Brexit vote. To be charitable, perhaps Mr. Carney’s call was just early. So, the BOE decided to do nothing and wait for more data, although it is now calling for higher inflation as the pound continues to come under pressure. And who knows, maybe Parliament will end up reversing the Brexit vote.

The ECB will hold its next meeting on December 8th, and Mario Draghi promised to announce new plans for the current 80 billion euro a month quantitative easing program. The ECB is running out of bonds to buy under current guidelines, and last week Berlin’s five-strong Council of Economic Experts called for an end to the program, and even went so far as to assert that loose policy threatens to put the future of the European project at risk. Direct language, even for the Germans!

You can’t blame central bankers for sitting on their hands. Yet, despite all this uncertainly, we continue to find good bonds that generate safe income. And surprises always seem to help uncover new opportunities.

Source: The Financial Times, Bloomberg, Capital Economics