May 08, 2024

This morning, the Swedish central bank became the second major central bank (a G10 country) to cut rates.

The Swiss National Bank was the first to kick off the easing cycle in March.

And as we discussed yesterday, rate cuts are expected to come in Junefor both the Bank of England and the European Central Bank.

Keep in mind, the Fed has tighter policy, measured by the real interest rate (the main policy interest rate minus the inflation rate), than any of these four central banks.  They should be cutting. 

So, despite the mixed signals the Fed gives, we should expect more and sooner action from the Fed than the market has priced in.  We should expect the  closely coordinated policiesof the past fifteen years, by major central banks, to continuein this easing cycle.

Remember, the Bank of Japan played the critical role of global liquidity providerthe past two years (the liquidity offset to the Western world's liquidity extraction/tightening policies). 

They made the first step toward exiting that roleon March 19th. 

And probably no coincidence, two days laterthe Swiss National Bank started the easing cycle with a surprise rate cut (adding liquidity). 

With that in mind, the Fed has convinced markets that they can patiently sit with high real rates, until they manufacture their desired inflation rate.  The actions of their central bank counterparts tell a different story.  They don't have the luxury.  They are all a liquidity crunch away from returning to the business of QE.