Bob Homan: Policy interest rate cuts do not matter

Bob Homan: Policy interest rate cuts do not matter

Monetary policy
Bob Homan (Cor Salverius Fotografie) 980x600

This column was originally written in Dutch. This is an English translation.

By Bob Homan, Head of the ING Investment Office

The how and when is not so important, but the direction of the policy interest rate is. And it only goes one way: down.

Will the Fed cut interest rates in March or May? And another three, four or five times during the year? Will the ECB follow suit immediately in April or June? And do central banks therefore meet market expectations? Strategists and other market researchers talk and write about this every day. Perhaps a bit of an exaggeration, but if you speak to a strategist for an hour, you will spend 45 minutes discussing the how and when of the upcoming policy interest rate cuts.

Of course it is good to know what the market is doing. But at the same time, I think, how much does it matter, beyond some daily volatility, to the ultimate direction of the financial markets? Four or five cuts, starting in March or May... it's all about the direction and most agree on that: the policy rate is going down.

As far as I'm concerned, the financial community spends too much time on trivial matters. Why we do that? In general, people tend to focus on topics that are easy to recognize and understand. At the same time, you can link a whole lot of other (sometimes trivial) things to such an interest rate expectation. Such as the question of whether the economy will perform slightly better or worse than expected and whether inflation will be better or worse. The nice thing about all this is that you can't make big mistakes. If the interest rate is lowered a month later than you predicted, you can probably come up with a good reason why it happened that way and 'oh well... that month doesn't make much difference anyway'.

The real question facing investors, namely what to do with their portfolio, remains in limbo. Or at least there is little concrete answer to this question. Because there are so many moving parts that influence the financial markets, most market researchers stick to vague predictions with many ifs and buts. Those who are concrete, in addition to rational matters, also let their feelings play a role. But that feeling usually does not produce the intelligent story of an argument that is packed with trivia.