Macro Commentary
There is a chink in the armor. In a post-crisis world, central bankers have been the super heroes swooping in to snatch potential victims from an unseemly fate. However, recent market activity suggests that some are starting to question the “super” powers central bankers really have. Recent market action in Japan is a case in point. After the recent announcement to cut interest rates charged for banks to deposit excess reserves at the Bank of Japan (an action several other central banks have done), the equity market pop that followed quickly faded. Traders now are asking whether negative interest rates are actually a policy error. The reason they could be problematic is that the action costs banking institutions profitability both directly (by charging an interest cost on excess reserves) and indirectly (pushing the front end of the yield curve lower pulls down the long end potentially reducing the rate on loans the bank would make). Another impact to the equity markets from negative rates is the signaling effect. The communication of how and why negative rates function, or lack thereof, has left many to wonder whether central bankers are really out of bullets. We do not think they are necessarily, but at the same time we are cognizant of the fact that a central banker’s primary “super” power is the belief others have in them. If the belief stops, so does the ability to save the day.