Are central banks being honest?
Today the Bank of England raised interest rates by 0.5% taking them from 1.25% to 1.75%. This is the largest ever increase since the Bank became independent but is in line with most other banks around the world, so nothing unusual there. But what is not in line with most other banks is the 'both barrels' delivery of the message from the Bank of England Governor.
The Governor, Andrew Bailey, said that he expects the economy will shrink in the last 3 months of this year and will then keep shrinking until the end of 2023. That means a full one year of recession and would make it the longest downturn since the 2008 financial crisis. The words that were used were also striking: "Britain faces a protracted recession and the worst squeeze on living standards in more than 60 years" as it forecast inflation would hit 13 per cent by the end of the year.
Andrew Bailey is know for his candid delivery but even by his standards this was blunt and while noting that it was likely to further impact the less well off in society he countered that an environment of persistent inflation would be even worse for those most at risk.
But while the Bank of England is clearly coming out with the glass half empty view, other central banks seem to be focusing on the glass half full view. This is particularly the case from the US Fed where Powell's messaging has been that a recession could potentially be avoided which gave a positive uplift to the markets.
So which is the correct approach?
Read on and take a look at the video below.
Well "it will be what it will" as they say. So typically the best approach is to give the most honest update based on the facts that are available at the time.
And that's the rub isn't it? All the facts are simply used to build forecasts and the only thing you can guarantee about a forecast is that it will be wrong. In fact analysts say that the US Fed has never accurately predicted a recession.
So what you are seeing here are two schools of thought. The glass half full approach which tries to keep the markets as positive as possible so that they stay high rather than dropping and exacerbating economic problems. Versus the glass half empty approach which is like taking your medicine without the sugar where the risk is that the markets drop. But if the markets are operating effectively they will be factoring in any future risks and adjusting stock prices based on economic data and company earnings and projections. The central bank is just one additional view that they would take into account. So the nasdaq, s&P, Dow and Russell2000 will keep going up and down as they have always done.
Which means in the long time the markets will get it right anyway and in the short term these Bank updates are more of a sideshow, so sit back, get your popcorn and enjoy!
The important question to ask yourself is how do you make money if your income stays the same but the price of food, energy and gasoline is rising. It's no coincidence that the trading performance of the big banks has increased this year. Choppy markets make for great trading conditions.
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