Central Bank Watch: BOE, ECB, & Fed Interest Rate Expectations Update

CENTRAL BANKS’ EXCITING 2020 YIELDS TO QUIETER 2021

The final week of the month has seen little by way of central bank activity – fairly typical for the Christmas-New Year’s interlude. But the lack of activity in terms of new announcements or policy changes veils what has otherwise been another banner year for central banks. Central banks have added over $7 trillion to financial markets since March 2020, led by the Federal Reserve’s expansion of its balance sheet by over $4 trillion.

Looking ahead to 2021, no major central bank is expected to raise rates in the new year. Even if the global economy heats up, central banks will not tamper with the early stages of a global recovery and pullback support to markets in 2021. ‘Overshooting’ of inflation targets will be a popular conversation among central bank watchers, a suggestion that interest rates will stay low for many more years.

Even if growth is gathering pace, traders shouldn’t be surprised if the major central banks (Fed, ECB, BOJ) announce additional quantitative easing measures. We’re in a period immediately post-crisis – an appropriate historical allegory in early-2009: low interest rates and ample liquidity.

In this edition of Central Bank Watch, we’ll cover the trio of central banks that typically garner most of the attention in financial markets. Both the European Central Bank and Federal Reserve have pumped trillions of dollars (and euros) of liquidity into financial markets. Meanwhile, the Bank of England will be juggling the economic recovery from the coronavirus pandemic while making sure Brexit doesn’t lead to other issues for the UK financial system.

FEDERAL RESERVE JUST WANTS STABILITY

One of the questions in 2021 will be, “will Jerome Powell serve a second term as Fed Chair?” as his term comes to end in February 2022. It stands to reason that, much like his predecessors before him, US President-elect Joe Biden will retain the Fed Chair during a crisis, allowing him to continue his work to do “whatever it takes” to save the US financial system from a collapse (a job well-done so far). Fed Chair Powell’s tenure at the Fed will be extended, making this a non-issue.

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