Rarely has there been a time when central banks are facing internal divisions to the extent that it is almost impossible to divine the near-term course of interest rates. This month's decisions by the major central banks have given off mixed signals, leaving investors with no clear outlook for monetary policy. Modern central bankers pride themselves on being transparent as to the expected path for rates over the short to medium term. However, it is becoming more difficult for investors to read central banks these days, largely because the bankers themselves are struggling in setting out a clear view.  

The Federal Reserve cut its benchmark rateagain by a quarter point earlier this month. However, the decision was not reached easily as three dissenters out of 10 voted against the rate cut but for entirely contradictory reasons. Two dissenters thought a rate cut unnecessary, arguing the economic conditions did not warrant further stimulation. The third dissenter took an entirely opposite view and wanted the FOMC to adopt a bigger, half-point cut. Clearly, this considerable debate on how much further the Fed will lower rates during this remainder of this year, if at all.These apparent divisions have resulted in a series of mixed, even contradictory, messages from Fed speakers and this situation is not likely to change in the coming months. As the world’s most significant central bank, the Fed’s lack of unanimity is not what the financial markets are anxious to see.

The European Central Bank announced a package including rate cuts (further into negative territory) and the restarting of its quantitative easing program featuring sovereign and corporate bond purchases. Immediately it faced a barrage of criticism. Sabine Luatenschlager, a member of the ECB rate-setting committee resigned immediately in the wake of the decision, despite having two years before her mandate expires. The strongest dissension came from Jens Weidmann, head of Germany’s Bundesbank who argued that the ECB “overstepped the mark”. He insisted that he will “ do what I can to ensure that interest rate increases are not put off for any longer than necessary.“ Adding to the chorus of critics were the heads of the French and Dutch central banks, the latter who maintained that the rate cut was “disproportionate to the present economic conditions.” The German criticism feeds into the concern that Europe’s monetary union remains on shaky ground and still suffers under the weight of the 2012 debt crisis. At the heart of the controversy is the impact of negative rates on savers, especially among Germany’s aging population.

 Thus, central banks are trying to fashion monetary policy in a world thatis clouded by trade wars, currency wars, disinflation, and a worldwide slowdown. In particular, the slump in manufacturing worldwide is at the forefront of what is ailing these economies.The biggest disappointment is the decline in business investment throughout the advanced economies and all the monetary easing to date has not revived business confidence. No wonder central bankers are conflicted. In Europe there is political pressure to boost interest rates, while in the U.S. political pressure is calling for further rate reductions. 

The Fed is just 200 bps from zero bound interest rates and the Europeans and Japanese offer only negative interest rates to savers and bond holders. The central banks have so little runway left to achieve lift-off.