The Federal Reserve kicks off the rate-cutting derby with its decision today to cut the Fed funds rate by 25bps. With the world’s most important central bank taking the lead, we can expect other central banks to follow for reasons that are common to all.

To begin with, there are two over-arching reasons behind the move to lower interest rates. First, developed countries are starting to experience worsening domestic conditions. US business capital investment has been softening and the real concern is that, with the economic expansion now long-in-the-tooth, without new investment economic growth cannot be sustained by the consumer alone. Secondly, more than in any time in the last 30 years, trade wars are now leading to a worldwide slump. So, how are these two issues influencing central bankers?

The Federal Reserve, in its long history, has rarely made policy decisions on the basis of international trade developments. However, that seems no longer to be the case, as Fed speakers have consistently fretted over the potential impact of trade wars with China and the EU that now are starting to be felt throughout the domestic economy.  The Fed stated that “the implications of global developments for the economic outlook as well as muted inflation pressures,” necessitated a rate cut. The Chairman emphasized in his press conference that he was most concerned with these ‘downside risks’ as threats to the outlook.

The Bank of Japan continues to contend with low inflation, currently running at 0.6% annually, despite the presence of negative interest rates throughout its bond market. In addition, the BoJ has been the most aggressive central bank in buying both government debt and selective equities as part of a long-standing program of quantitative easing. It set the standard for QE that has been adopted by the Fed and the ECB. To many observers, the Japanese experience with deflation is a central banker’s worse nightmare, possibly a harbinger of how contemporary economies will evolve as time goes on.

The European Central Bank has made it known that it will likely cut its policy rate further into negative territory (currently at minus 40bps) and possibly expand its bond-buying program before year’s end. Growth has been abysmal in the EU and disinflation has returned. In addition, the EU is facing the prospects of US tariffs on major exports and we are seeing early signs of manufacturing weakness in Germany which will likely spread to other EU nations.

The Bank of England is under considerable pressure as the country prepares for Brexit, deal or no-deal. The UK pound is dropping, contributing to imported inflation. At the same time, domestic growth in being undermined by the great uncertainty due to the internal political turmoil arising out of Brexit negotiations. The BoE is almost in a no-win situation, lowering rates puts downward pressure on the pound, yet without lower rates the UK economy will slip into recession, post-Brexit.

The Bank of Australia has already lowered it bank rate twice, once in June and then again in July. The bank made it clear that the “uncertainty generated by the trade and technology disputes is affecting investment and (this) means that the risks to the global economy are tilted to the downside”.

The Bank of Canada remains the only hold out in resisting a shift in policy. The Bank maintained, in its latest rate decision earlier this month, that monetary policy was sufficiently accommodative and that it expects growth to pick up in the latter part of the year. There was no hint of the need for a rate cut in the near future, according to Governor Poloz. Given a worldwide movement to lower rates that decision will test the Governor’sresolve.

The Fed Chairman was quick to point out that this rate cut was just a ‘mid-cycle’ adjustment, not the beginning of a broad-based easing cycle. However, he may have been too quick to come to that conclusion. We see no evidence on the horizon that the US administration is about to come to an amicable agreement with its trading partners and hence the downside risks will continue to plague central banks.