ECB Cuts Rates; Expect the Fed to Hold Rates This Week

March 14, 2016

ECB Cuts Rates; Expect the Fed to Hold Rates This Week Photo

Last week, the European Central Bank (ECB) increased monetary stimulus. The continued stimulus was widely expected, but the amount exceeded expectations. The most recent stimulus involved four components.

  1. The main refinancing rate was reduced by five basis points (bps) to 0% and its marginal lending rate to 0.25%.
  2. The deposit rate was reduced from negative 0.30% to negative 0.40%.
  3. Monthly asset purchases will increase by 20 Billion euros to 60 billion euros. The total program is now 1.7 billion and includes investment-grade non-financial corporates.
  4. Additional special loans with a four year maturity to spur bank lending were offered with a rate of 0% to negative 0.40%.

The additional stimulus came with guidance that the ECB expects low inflation for a prolonged period of time.

The Fed meets this week, and I don't expect them to increase interest rates until June at the earliest. I do anticipate they will cite improving economic conditions, with inflation still remaining below the 2% target.

Risk markets have performed extremely well over the last three weeks. Equity markets, high yield bonds and energy prices have risen substantially in price. I expect this rally will slow as valuations have adjusted very quickly, approaching fair value and key technical resistance levels.

Tags: Monday Morning O'Malley | Federal Reserve | European Central Bank | Negative yields

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