Weekly Economic Report
Long term interest rates fell around the world this week as investors grew concerned about the strength of the expansion – for a number of reasons. Those concerns were reinforced by more accommodative actions from central banks – all around the world. The Chinese central bank unexpectedly announced a reduction in reserve requirements to take effect July 15th. Fed Chair Powell was more dovish than expected in comments Wednesday – heading into the mid-year (previously Humphrey-Hawkins) congressional testimony. And, the ECB announced that it 2% inflation target was no longer a ceiling – not that it made much difference in reality. To us, the key is that central banks were quick to react to even modest signs of economic slowing – despite the fact that growth everywhere is expected to remain well above trend near term. Moreover, booming exports already have China operating above its previous long run trend and the US is expected to reach that level this quarter. Only Europe is lagging behind – and their central bank has no mandate to promote growth, only to control inflation. Bottom line, central banks are clearly no longer the same defenders of price stability as over the past four decades.