Central banks: To neutral or beyond?
• Central banks are now set on going to ‘neutral’
• This is priced already into bonds and stocks
• But the Fed may need to get ‘restrictive’ eventually
• Our view – this will play out over years, not months
• US stock sectors have diverged this year (Focus p2)
Overview
After a slow start the major central banks are now intent on pushing policy rates up to ‘neutral’. The neutral rate is supposed to be where there is neither stimulus nor restriction. Of course they don’t exactly know where it is, though they are sure they are below it now. The Fed puts the neutral rate at 2.5-3%, while the ECB thinks it is between 1-2%, and the
Bank of England puts it in the range of 1.25-2.5%, in their respective economies.
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