Key takeaways:
- The Federal Reserve and the Bank of England held rates steady
- Germany voted to change its debt policy
- U.S. jobless claims ticked up
On the latest edition of Market Week in Review, Director and Global Head of Solutions Strategy, Van Luu, discussed the latest rate decisions from key central banks. He also talked about fiscal reform in Germany and reviewed recent U.S. market performance.
No cuts
Luu began by noting the U.S. Federal Reserve (Fed) opted to leave interest rates unchanged at its March 18-19 meeting, maintaining its policy rate in a range of 4.25%-4.50%. This marked the second straight meeting where the Fed held rates steady, he said.
“The central bank’s updated economic projections suggest a growing risk of stagflation,” Luu remarked, explaining that the Fed raised its forecast for inflation while lowering growth expectations. The central bank also announced it will slow the pace of its balance sheet reduction beginning in April. The Fed is doing this to avoid disruptions to markets as political negotiations to raise the U.S. debt limit play out, Luu stated.
Markets reacted positively to the Fed’s decision, he said, noting Chair Jerome Powell downplayed inflation and recession risks at the follow-up press conference. “This helped lift the mood in markets,” Luu remarked.
Shifting to the UK, he said the Bank of England (BoE) also left its key lending rate unchanged at 4.5% in an 8-1 vote. “This was a slight hawkish surprise for economists, who had expected one more voting member to join Swati Dhingra in favoring a cut,” Luu commented.
He added that both central banks attributed their wait-and-see attitude on rates to high uncertainty surrounding international trade policy.
Looser limits
Turning to Germany, Luu said the country’s parliament—known as the Bundestag—passed a constitutional amendment on Tuesday to reform its “debt brake” policy. The “debt brake” restricts how much money the government can borrow. The amendment, which passed with the required two-thirds majority, will allow for much higher spending on defense, infrastructure, and environmental protection, Luu said. He added that Germany’s upper house—the Bundesrat, which represents the state governments—is expected to pass the legislation Friday.
“From my vantage point, this fiscal reform in Germany is very important and positive for the growth prospects of Europe’s largest economy. It resembles former European Central Bank President Mario Draghi’s “whatever it takes” attitude in 2012 when the integrity of the euro area was in doubt,” Luu remarked.
Stabilizing markets
Luu finished with a look at recent U.S. economic data and market performance. The latest data was mostly in-line with economists’ expectations, he said. “Jobless claims edged up and the Philadelphia Fed’s manufacturing index was slightly better than expected, although the outlook component of the index worsened,” he said.
Meanwhile, U.S. stock markets stabilized this week—a welcome reprieve for investors after last week’s decline. Through Thursday, the S&P 500 was positive on the week, Luu noted.
“The respite comes as our proprietary measure of investor sentiment is suggesting oversold conditions in the U.S. stock market, which could indicate a potential buying opportunity,” Luu stated.
He concluded by adding that on the fixed income side, bond yields fell moderately and prices rose as investors were soothed by Powell’s optimistic remarks on tariff and inflation risks.
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