Central Banks Speak

Central Banks Speak

September 16, 2020

The US Federal Reserve (Fed) and Bank of Japan (BoJ) both meet this week, while the European Central Bank (ECB) met last week. When central bankers talk— markets listen.

“The global economy has been steadying faster than many expected,” said LPL Financial Chief Investment Officer Burt White. “But we still have a long way to go, and central banks will still be focused on risk, which means the story of the week from central banks will likely be all about steady support for as long as it’s needed.”

Central banks continue to provide market liquidity through bond purchases at a steady clip. As shown in LPL’s Chart of the Day, major central bank balance sheets have risen sharply this year. The three major central banks—US Fed, BoJ, and ECB—have expanded their balance sheets by about 45%, or over $6 trillion, as of the start of the year,  which is larger than the first round of bond purchases during the Great Recession in percentage terms and much larger in dollar terms.

View enlarged chart.

Here’s what to watch for in this week’s central bank meetings:

  • US Federal Reserve. The Fed concludes its two-day policy meeting on Wednesday, September 16. In addition to the Fed’s brief policy statement, we’ll get updated projections and a press conference from Fed Chair Jerome Powell. We’ll be watching for more detail on the Fed’s revision to its policy framework, which may let inflation run a little hotter than in the past before pumping the breaks. Powell has become a more effective communicator over the course of his tenure as chair while increasing overall Fed communications, and his press conference will be closely watched.
  • European Central Bank. The ECB met last Thursday (September 10) and left policy unchanged. While acknowledging economic improvement, ECB President Christine Lagarde said the improving picture was in line with expectations. Markets were watching for any signs of concern about the euro’s appreciation against the US dollar, but LaGarge emphasized that the ECB doesn’t target interest rates. An increase in the ECB’s stimulus program is still expected by the end of the year.
  • Bank of Japan. The BoJ meets Thursday, September 17, and likely will also be on hold as it assesses improving economic conditions, with the leadership transition at prime minister garnering most headlines this week. Japan also has concerns about currency appreciation but is unlikely to do anything other than perhaps try to have an impact through its messaging.

Central banks will be increasingly acknowledging improving economic conditions this week, and hopefully, over the coming months, but it will be no barrier to maintaining extraordinarily supportive monetary policy for an extended period. It will take time for the global economy to be working at full potential, policy changes are signaling increased tolerance for inflation, and economic risks around COVID and its long-term economic impact remain. For now, the economy still needs all the help it can get.



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