Central Banks Throwing Everything They Have At the Problems
Between the European Central Bank, Bank of England, and Bank of Japan, the world's central bankers are all throwing everything they have at the economic problems. While things look a little better in the U.S. with Friday's stronger than anticipated employment numbers, the international economic picture is tying the Fed's hands. All of this economic maneuvering going on in the halls of global financial policymakers continues to underpin gold prices for the long term.
Bank of England Delivers Rate Cut and Stimulus Measures
The Bank of England has reviewed incoming data and determined that some of their grim fears for the British economy in the wake of the Brexit decision to leave the EU are coming true. This past Thursday the bank decided to attack the problems before they become worse. They unleashed their largest stimulus package on the British economy since the depths of the financial crisis. This meant more than just lowering the principal interest rate to an all time (over 330 year) low of .25 percent. They also started back up their quantitative easing program and launched a new program to purchase company's debt and provide inexpensive credit to British lenders. The committee members felt that these measures were necessary in order to encourage a greater amount of lending, lower borrowing costs, and boost confidence. They have also pushed the pound down more in the process, which will help British exporters by making their overseas goods cheaper. The majority of policymakers on the Monetary Policy Committed were prepared to deliver still more stimulus measures later in the year if the need arises.
It remains to be seen if this will be enough to stop a U.K. recession from happening. The signs of economic decline are showing. BOE Governor Mark Carney and Deputy Governor Broadbent see it in a variety of indicators that demonstrate what is occurring in the fifth largest economy of the world. The PMI data in Britain is already providing them with the sharpest declines in permanent hiring they have seen down to levels last witnessed in early 2009. Other surveys they are following suggest the economy is already contracting. The greatest concern surrounds a statement Broadbent made. The Bank of England and government will not be able to fully counteract the economic hit that Britain will likely experience because of leaving the EU. This includes using tax cuts, government spending, or monetary policy. It matters enormously as other finance ministers and central banks are all watching to see how badly this economic damage will spill over into their own economies.
Increasing Bank of Japan Monetary Policy Losing Effectiveness
Japan is also attempting to jump start their continuously weak economic growth and actually increase inflation. It has just reviewed its monetary policy. Economists that Bloomberg surveyed believed by a majority of 22 out of 33 that this increases the case for yet still more expansion in their stimulus. This will come after the Bank recently boosted its purchases in Japanese bonds and stocks. Fully 28 of the 33 economists surveyed anticipate that the central bank will hold its interest rates negative, even though commercial banks are against it. The next meeting is not until September 20-21, but already the central bank is looking at more ways to intervene in the Japanese economy. Governor Haruhiko Kuroda and Deputy Governor Kikuo Iwata have previously both announced that the present policies will not be shrinking. The problem is that numerous economists and investors are already wondering if the program has reached its maximum effectiveness and limits.
Fed Wants to Raise Rates But Has Hands Tied By Other Central Bank Actions
Meanwhile in the U.S. the Fed wants to increase its rates but is finding itself boxed into a corner by the international stimulus. The stronger than expected jobs report on Friday represented a bright spot in the otherwise bleak international economic landscape. Jobs increased by 255,000 for July, while employers hired 18,000 additional employees for May and June than had been reported earlier. This greater than anticipated employment result helps to offset the abysmal GDP growth number of 1.2% for the second quarter of 2016 that came out recently. Even if Yellen wants to increase the U.S. rates, she is hampered by the international efforts of the other central banks. If she takes action that reduces economic and loans activity, this has the potential to cancel out the effects of the stimulus of the Bank of England. It again makes any rate increase challenging for the Fed at their September meeting.
At present these financial and market issues around the world are not going away even with Central Bank intervention. With rates negative in the Euro zone and Japan and quantitative easing stimulus already going on, there is a limit to what more can be done. The Bank of England deputy governor has admitted that they can not solve all of the problems with their tools and those of the British government. This all argues for making gold a part of your portfolio and retirement holdings if it is not already.