With U.S. economic growth slowing and profits falling, our Federal Reserve is between a rock and a hard place. Just six months ago, they expected a more robust economy and indicated four interest rate hikes for 2016. But that was quickly reduced to just two hikes when the Fed was spooked by risks in global economies and financial markets back in February (i.e. China, Japan & Europe). And now, even those two rate hikes are questionable as conditions deteriorate further.
The Bank of Japan (BOJ) surprised global markets last week by failing to create additional stimulus by taking its interest rates further into negative territory as they are already below 0%. Japan’s Nikkei stock index peaked at 39,000 in 1989, hit a low of 7,000 in 2009 (20 years later!) and is now back up to only 16,666. Thus, after 26 years of economic and fiscal stimulus strategies, the Japanese market is still down over 50% from its 1989 high.
Europe, too, is struggling to keep their various economies out of recession and reported a tepid 0.6% rate of growth for Q1 2016. The European Central Bank (ECB) is also using Negative Interest Rate Policy (NIRP), just like the Japanese, trying to spark some life into their economies.
If this were a card game, the world’s central banks (Fed, ECB & BOJ) could be said to have pushed all their chips onto the table. Time will tell if their QE, ZIRP and NIRP strategies succeed. Nonetheless, it would be nice if this were merely a card game and not a house of cards.