Back in the days following the great recession when the US Federal Reserve needed to supply some "extra" ordinary monetary stimulus in an attempt to re-build economic and investor confidence they introduced Quantitative Easing as a bold new step and it had the impact that they were looking for. They followed with two more efforts and financial markets went into a dither which was dubbed the "taper tantrum" in 2013 when it became clear that they were not going to follow with more.
In 2011, The European Central Bank, facing a debt crisis and a currency crisis adopted the extraordinary measures to subdue the negativity. Again a successful effort as calmer financial markets followed in their wake. There have been a number of extraordinary measures added since then and the Bank Of Japan and Bank Of England also joined the party.
However, like Pavlov's dog, financial markets, it appears, have become expectant of something each and every time that central bankers make their interest rate decisions.
When they hold back on further stimulus, it causes convulsions. When the Fed raised rates in December of 2015, volatility spiked in January and February of 2016. Central bankers live in fear of volatility and the end result of how that impacts economic decision making, so they have taken on a leadership role that necessitates making financial markets happy in order to keep volatility at bay.
They do not cherish this role.
They want business leaders to use the "cheap money" to invest in their businesses to increase productivity and enhance economic growth. Instead, lingering uncertainty has pushed business leaders to take a more short-term view: buy back their company's shares, pay more dividends out to shareholders and not necessarily make the longer-term investments in productivity and growth.
But, having had to adopt this leadership role, central banks are not certain as to what to do next.
The Fed wants to "normalize" interest rates, but there will be consequences (probably a recession) and are they ready for those? They will make their announcement at 2pm on Wednesday.
The Bank Of Japan decision is due out late Tuesday (11pm EDT) and it is unclear whether they will stay on the fence as did the European Central Bank or make bold new moves in monetary stimulus. There are arguments for both sides, but they will likely be reluctant to add to a policy that has so far had a limited impact.
Central bankers would certainly like to hand off the reigns of economic leadership and move gently into the background in their intended "supporting" role, but there appears to be nobody willing to take those reigns.
Until that happens, it is likely that the global economy will struggle.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist