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Passing the Baton: Signs of Fiscal Stimulus Emerge

Passing the Baton: Signs of Fiscal Stimulus Emerge
Key Points
  • After monetary policymakers took action to lower interest rates and ease financial conditions, they have been asking for fiscal policymakers to enact stimulus though stepped-up government spending and tax cuts. 

  • Global central bankers may be starting to get their wish – with a growing list of countries unveiling fiscal stimulus over the past two months.

  • If this is the start of a broader trend, it may bolster business leaders’ global economic growth outlook for 2020.

Global central banks moved quickly from raising interest rates in the second half of last year back to cutting rates in 2019. Central banks have been increasingly lowering interest rates this year, as you can see in the chart below.

Central banks increasingly shift to cutting interest rates

Number of central bank cuts

*September 2019 data only through 29th of month.
Based on a study of 78 central banks.
Source: Charles Schwab. Data from Bloomberg as of 9/29/2019.

Since the last rate hike by the Fed in December of last year, there have been 95 global central bank rate cuts, with the U.S., Hong Kong, Brazil, and China being the most recent countries to cut rates.  

Number of central bank interest rate cuts since Fed stopped hiking rates

rate cut table

Based on a study of 78 central banks.
Source: Charles Schwab. Data from Bloomberg as of 9/29/2019.    

Global interest rates are down more than 70 basis points this year, as measured by the Bloomberg Barclays Global Aggregate Bond Index. The rate cuts are likely to continue, we expect one more Fed rate cut this year. 

The efforts of monetary policymakers to lower interest rates and ease financial conditions may not be enough to halt the global economic slowdown which hasn’t had anything to do with high interest rates or tight financial conditions. This summer, monetary policymakers have been asking for fiscal policymakers to enact stimulus though stepped-up government spending or tax cuts: 

  • The Fed’s Chairman Powell has said that fiscal policy is more powerful than monetary policy, and that monetary policy should not be the “only game in town.”
  • The new head of the European Central Bank, Christine Lagarde, has reiterated departing head Mario Draghi's calls for Eurozone governments to offer more support with fiscal policy. 
  • The Bank of Japan's head, Haruhiko Kuroda, has invited the Japanese government to take advantage of negative interest rates with additional fiscal policy.

Central bankers may be starting to get their wish. Over the past month and a half, there has been a growing list of countries focusing on fiscal stimulus, starting around the start of this year’s annual gathering of central bankers and finance ministers in Jackson Hole, WY:

rate cut table 2

In the Eurozone, there has been increasing talk within Germany’s leadership to step up spending. In September, the government unveiled a 54 billion euro climate change spending package for 2020-2023. Additionally, the German finance minister has broached the subject of tax cuts. If more countries jump on the fiscal stimulus bandwagon, it may prove more effective at stimulating growth than additional rate cuts by the central banks.

The economists at the Organization for Economic Co-operation and Development (OECD) do not foresee a single developed country entering into a recession in 2020, and even expect half of those countries to see economic growth reaccelerate next year.

Economists expect no developed country to be in a recession in 2020

OECD growth

Source: Charles Schwab, Macrobond, Organization for Economic Co-operation and Development, data as of 9/25/2019.

Unfortunately, business leaders do not share their optimism. 

Most CFOs expect a recession next year

CFO expectations

Source: Charles Schwab, CFO Magazine/Duke University survey data as of September 2019.

Since business leaders actually make the decisions that can influence the economic growth, their outlook could become self-fulfilling. Despite interest rate cuts, the outlook of CFOs has worsened since June. Perhaps fiscal policy stimulus holds the key to turning around their outlook.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

 All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

 Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

 International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.  Investing in emerging markets may accentuate these risks.

The Bloomberg Barclays Global Aggregate Bond Index measures the performance of global investment grade debt from 24 local currency markets.  It is a multi-currency benchmark that includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers, excluding US Dollar-Denominated bonds. It is a market-value weighted index.


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