We've talked this week about the big central bank decisions, and the impact they may have on global liquidity, and therefore global financial stability.
Overnight the Bank of Japan took another step toward exiting its role as the world's global liquidity provider. They raised rates for a second time this year (which is only the second time since 2007). And the BOJ Governor Ueda signaled more to come.
And they laid out the plan to reduce the size of the program that has supported the Japanese government bond market, and other key asset markets around the world (including U.S. Treasuries) for the past decade-plus.
As we've discussed over the past two weeks, the global liquidity spigot is closing.
So, did we get at least a signal from the Fed this afternoon that they would join the counter-punch from the other Western world central banks, by starting the easing cycle?
Sort of.
The Fed held rates unchanged for the twelfth consecutive month.
But in the press conference, Jerome Powell made a good case (as he has in the past) for why they should have cut, which includes this very significant statement:
"The job is not done on inflation, but nonetheless we can afford to begin to dial back restriction in our policy rate."
Remember, both the European Central Bank and the Bank of Canada positioned the start of the easing cycle as just "removing restriction," as to not fuel market euphoria about the easing cycle. As I said, "that's an easy playbook for the Fed to follow … reducing restriction just to maintain the level of restriction as inflation falls.
No surprise to see the shared language from what has been and continues to be highly coordinated policy among global central banks.
So, if central banks continue to coordinate, why is the Fed stubbornly maintaining the tightest policy among the major central banks (the highest "real rates")? They will be the last to join the easing cycle, assuming the Bank of England cuts tomorrow, as expected.
Jerome Powell also admitted today that they have "a lot of room to respond" to a shock or weakness in the economy (i.e. plenty of rate cut ammunition, given the high level of the policy rate).
With that, it's no secret that this high level of rates is dragging down economic growth, which is running below trend even with the tailwinds of trillions of dollars of fiscal stimulus. And it's no secret that rates are harming the housing market, and burying the country in high government debt service costs. So, why are they stubbornly keeping rates high?
Are they worried about the dollar — preserving global capital flows to protect the dollar?