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Waning monetary policy effectiveness will fire debate

Friday, August 2, 2019

Significance

This closely followed the decision by the US Federal Reserve (Fed) to cut its main interest rate for the first time in more than a decade, accentuating investor concerns about the credibility and efficacy of monetary policy in major economies. The 0.25% cut was more modest than bond traders wanted, but having been prompted by economic weakness abroad, it is at odds with the solid domestic activity that some of the Fed’s own policymakers believe warrants keeping rates on hold.

Impacts

  • The benchmark ten-year US Treasury yield has fallen to its lowest since November 2016 and the uncertain outlook means it may fall further.
  • Emerging market bond funds have enjoyed eight weeks of inflows and investors will continue to seek higher-yielding opportunities.
  • More than 30 central banks in advanced and emerging nations have cut rates since the Fed’s dovish pivot in January; this number will rise.
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