On today’s show we are seeing another central bank drop their benchmark lending rate. The Bank of Canada dropped its benchmark interest rate for the third time in a row, leaving the rate at 4.25%. This is in stark contrast to the US Fed Funds rate which remains at 5.25%-5.5%.
Each country seems to behave like they are economic islands. But we have a globally interconnected economy and no country is an island unto itself.
We are not insulated from what is happening in Europe, or in China. We have a globally synchronized economic cycle that is being influenced by factors that are well outside the control of central bankers. Nevertheless ew have central bankers acting as if they can pull one lever with the left hand and slow down the economy, and gently pull another monetary policy lever with the right hand and accelerate the economy.
There is no question that we are seeing sustained economic slowdown in the US, in Europe, in Canada.
This is one of those good news bad news stories. Central bankers don’t aggressively lower rates unless they see a problem in the economy. Lowering rates is good news for borrowers, but it is really a reflection of bad news, This time it is being coupled with a good news narrative. We should be wary of the story that says this time is different.