The Fed may resist a rate cut this week….

This week will see how key central banks react to the growing economic weakness.

On Wednesday, the Fed will deliver latest stance on its monetary policy. Investors are expecting the central bank to ease this year but probably not at this meeting. One reason is that the Fed just hiked the policy rate last December. Changing its tune so soon only happens when something extraordinarily – like a market crash – happens. The Fed’s ‘dot’ interest rate projections will be an interesting one to watch.

In the UK, the Bank of England will probably keep the base rate unchanged because of subdue inflation rates. The MPC meets on Thursday. On the same day, the Bank of Japan is expected to stay on the current course.

Overall, central banks are likely to adopt a ‘wait and see’ approach as the global economy cruises ahead, albeit at a slower pace. In addition, stock markets are holding up reasonably well.

The only worry is the US yield curve remains slightly inverted, ie, the 10-year treasury yield is lower than the short-term ones. This means that the short-term rates are too tight relative to the long-end of the curve. For example, the US 10-year yield has plunged from 3.2% to near 2.1% in nine months due to wilting economic expectations (see Featured Chart). Thus there is scope for some rate cuts.

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