The Week: Monetary easing resumes: will markets be impressed?

It is deja vu all over again. This week, central banks have hinted at further rate cuts, but is monetary easing losing its potency?


  • The US Federal Reserve gave the clearest signal yet that the next move would be down rather than up
  • So far, markets have remained unimpressed, with the S&P 500 sliding over the week
  • Monetary easing doesn’t resolve the real issues for the global economy

The US Federal Reserve left interest rates on hold this week but gave the clearest signal yet that the next move would be down rather than up. The ECB followed suit, with Mario Draghi saying it stood ready to ease if necessary. It is a significant volte-face in just a few short months. Will markets be impressed? 

Not so far. The S&P has fallen over the past week. Given that there were two main problems troubling markets at the start of this year - rising interest rates and the trade war - this seems surprising. Policymakers would be right to ask whether loose monetary policy may be losing its power to thrill. 

Both appear to have substantively resolved, but markets aren’t fooled. They recognise that the trade war is a symptom not a cause and its resolution does little to address the wider questions over the balance of global economic power. This debate will not be solved by a quick deal, hastily cobbled together at a G20 summit. 

Rupert Thompson, head of research at Kingswood, hits the nail on the head when he says: “Fed easing will only lead to sustained further gains in equities if US/global growth bottoms out at a reasonable level, allowing further gains in corporate earnings.”

He believes a deal between Presidents Trump and Xi would resolve this, but buoyant equity markets have reduced the pressure on Trump to forge an agreement. While he may back away from the onerous tariffs proposed at the start of July, a full-blown deal looks unlikely. Low interest rates can’t resolve this and markets know it.

Nevertheless, it does change the balance of power across financial markets. It means that the fixed income market has been given a stay of execution. This week briefly saw German bonds turn negative up to 30 years and government bond yields remain near historic lows. 

Equally, it means that the hunt for yield goes on, supporting dividend paying equities. It also gives fuel to the rally in growth companies, low interest rates flatter their future cash flows and may mean that the extraordinary polarisation between value and growth stocks can be sustained. 

However, the fact that the Federal Reserve and ECB have been forced to reverse tack on monetary tightening so soon is a worrying sign for the global economy. Mumblings about the ‘Japanification’ of developed market economies appear to have real foundation.