NO ONE WINS THIS RACE
EDU DDA Mar. 13, 2025
Summary: We weren’t supposed to see ultra-low interest rates again. The way it was told, they were a product of a bygone era left behind after the skillful handling of the pandemic. Not enough people appreciate just how close much of the world already is to historically low market and policy rates ALREADY. Even previously reluctant central bankers are heading fast in that direction. Next week, Switzerland is going to be debating a return to a zero interest rate. NEXT WEEK. Of the rest of the major central banks, they aren’t all that far behind and most of them are fast heading in that direction.
A REAL RACE TO THE BOTTOM WITH THE CORRECT STAKES; OR, WHAT HAPPENS IF THE CURRENT RACE FINISHES AT THE BOTTOM.
A year ago next week, the Swiss National Bank (SNB) had kicked off the current and very much ongoing rate cutting cycle. It was a shock to the world which was, at that time, firmly captured by higher-for-longer. Officials at various central banks had indeed broached the idea of rate cuts entering 2024, though those were seemingly swallowed up by subsequent CPI estimates.
Many wondered if there would be a chance for any reductions, most of all politicians on the line with their voters. Governments as a class wanted to be able to deliver something, and rather than an actually functioning economy or the disinflation most of the public has been led to expect (lower prices, not simply price changes), why not lower interest rates as consolation?
However, even under governmental pressures at that time most central bankers simply were not sufficiently certain. Having been stung badly by the 2021-22 experience, and not anywhere close to proficient enough in actual economics, by being always captured by the last CPI meant stuck hawkish when the numbers didn’t cooperate.
The Swiss were ahead in that one respect. Their consumer price estimates had already started to move more assertively. This didn’t mean Switzerland was immune to the “sticky” debates and feelings riddling other central banks with doubts. SNB had to contend with stubborn price rates all throughout 2023, leaving the annual rate still at an uncomfortable (for the Swiss) 1.7% that December after being seemingly unable to move convincingly lower during the final six months of the year.
In early 2024, however, the index finally broke and SNB made its shocking move. Immediately called an outlier, that first global cut (among major central banks) was instead a warning (I pointed this out repeatedly) nobody wanted or maybe even could hear. Inflation was all anyone wanted to ponder, not the next possible race to the bottom. The very idea was thought impossible, utterly preposterous.
We certainly don’t need to litigate the history of in-between, or how markets had anticipated this exact outcome from the get-go. Instead, our purpose here is to check in on where everything stands closing in on one year since the official tide turned if only to get a sense where and how much there might be left to go.
For Switzerland, specifically, SNB has ended up lowering its benchmark repo rate at each of the four meetings starting with the one in March 2024; three twenty-fives followed by a fifty to end the year. When Swiss central bankers meet again next week, it’s almost certain they’ll lower their rate once again. Any debate centers on by how much; probably twenty-five though a fifty cannot be ruled out even if going that route would put them right back at zero again.
Maybe next week.
That’s the whole thing in a nutshell right there. Even after the rate cutting began last year, central bank after central bank promised only a few modest adjustments. A couple of cuts only to take some of the edge off their “restrictive” policy positions. It was widely expected that if officials got far enough with consumer prices to pivot on policies, they still wouldn’t go far or very fast.
The idea of a “race to the bottom” was out of the question given perceptions of sticky CPIs; perceptions, by the way, which continue to dominate as if those setting them are unaware by how much the situation globally has completely changed. Not enough people appreciate how far rates have gone already. The race to the bottom isn’t just here, in most places it is already quite advanced, many places closing in on bottom.
WHEN I MADE THIS LAST MAY, IT SEEMED RIDICULOUS TO A LOT OF PEOPLE.
This disbelief stems from the same misperceptions as what drive fixations on monthly CPIs. The supply shock was never inflation, so the idea of truly sticky money was never actually on the table (as discussed in detail yesterday). What was going to dominate the long run was only ever the aftermath of the supply shock, the lockdowns, and impoverishing price illusion.
Growth was impaired and because it was never inflation that meant, for interest rates, long run inflation expectations were inevitably heading back to the 2010s as was, sadly, growth expectations, too. More and more we see how swaps had it right, or are very close to being vindicated, by pointing to long run expectations for bottom-feeding rates all over again as if we only temporarily left the previous decade.
Not even a year later, SNB is right now actively considering zero that’s how far it has gone. Next week a major zero is a far-from-zero possibility. And if not March, June is looking like nearly a lock.
Consumer prices in Switzerland continue to “undershoot” as the rate of growth keeps decelerating. Lower policy and market interest rates haven’t helped one bit – this isn’t a surprise, we know lower rates aren’t stimulus, merely a reaction to what the latest economic data is now showing more strenuously.
The Swiss CPI increased by 0.3% year-over-year in February, the lowest so far and also very near zero, winning that race to the bottom, as well. SNB will say that the only reason prices aren’t negative is because of its “forceful” rate response, but that’s the same “jobs saved” nonsense as is always offered on total failure to achieve policy goals. They can claim rate policies have at least flattened the slope of the price change deceleration all they want; it doesn’t change the slowdown in GDP nor the continued rise in unemployment (though the official rate did dip by a tenth in the latest update).
Going to zero would be them admitting the possibility of outright deflation remains far from unthinkable.
Then there is Canada. The Bank of Canada cut its rates again just yesterday. This is another one that maybe not enough people appreciate for how far the “pivot” has advanced (or regressed, depending on your perspective). The meaning of pivot was supposed to be as described above; a gentle shuffle from “restrictive” to less restrictive and maybe “neutral” eventually, over the course of several years of occasional rate cuts.
Canada was instead down a whopping 175 bps in just six months to close out last year, having started out intending to be methodical and careful. Add another 50 bps in two doses so far in 2025, including yesterday, the official Canadian rate has been lowered from 5% all the way to 2.75%. Like SNB, BoC is – right now - within sight of its “historically low” rates which dominated the entire 2010s.
The economic data justifies the response. Whereas Canadian payrolls had utterly exploded hotter in December, rising a whopping 179,000 on the month, far and away better than anything since 2021’s attempted recovery, that was merely more confirmation of the artificial high – and the scale of it – that the world economy experienced at the end of 2024.
And therefore, more importantly a sense of what the payback might end up looking like for the rest of the first half of 2025; a sense already echoed by the sheer level of distortion in trade, with exports soaring through January, accounting for much of the payroll gains. The downside has already emerged in them, with February being very near a negative, where hours (like in America) tumbled by a whopping 1.3% as full-time jobs disappeared, thousands exited the labor force, and the participation rate retreated all over again. (this sounds very familiar).
Of the world’s major central banks (I’m not including Japan or China; the former because of it being a clear outlier while the latter due to its persistent rate cutting anyway; as the PBOC reaches closer to zero and into further historic lows on its one-way trajectory, it basically “cancels” out BoJ), Canada and Switzerland are “leading” the race. Lagging are the Fed and Bank of England, with the Riksbank (Sweden) and ECB closer to the leaders than the laggards (to be clear, the nominal rate in Canada is higher than either Sweden or the ECB, but BoC has moved farther and faster to end up close to both).
Sweden’s institution, the world’s oldest, has gone from a peak of 4% down to 2.25% currently. And while GDP has turned positive again like Europe’s, the country is still experiencing persistent joblessness which will keep the central bank moving in the same direction as everyone else and right into the territory of historic lows.
Europe’s central bank cut once more last week, an action that got lost amidst the very much related fury over Berlin’s possible fiscal bazooka. Lagarde indicated officials there were taking the possible fallout from tariffs, not to mention the louder warning sirens from the labor market, very seriously. The ECB is just behind the Swedes, starting from the same 4% and currently sitting just above them at 2.50% (deposit rate) with more to come.
Again, the central bank race to the bottom is almost completely unappreciated by the wider public, certainly those here in the United States where attention is entirely Fed-focused. Even outside, the degree to which ST rates have been intentionally lowered doesn’t quite hit home in the same way, either. Part of the reason stems from the falsehoods preached by central bankers themselves on interest rates, the other comes from the forgot-how-to-grow style recession.
Officials the world over continue to claim their rate cuts are nothing more than “normalization”, taking “extraordinarily tight” rates and backing them off to hit a soft landing they claim is the base case. It seems reasonable that if you accept the characterization then some significant rate cutting would be needed to go back to normal. Yet, to go this far with it admits “normal” is nearer historic lows than not, and so, yes, 2010s economy is coming from the official sector, too (the whole R* debate).
Otherwise, everyone is accustomed to this degree of rate cutting only when confronting the traditional recession – seeing GDP fall off sharply and layoffs come with it, not just a rising unemployment rate for the total lack of hiring. This setup makes the prior claims of normalizing seem entirely plausible, at least until you really do come to appreciate how far the race to the bottom has gotten.
There is nothing normal about this, just starting with how it has been forced upon reluctant officials everywhere (including the Fed where no one wanted a fifty in September).
CENTRAL BANKS FOLLOW MARKETS, NOT THE OTHER WAY AROUND.
As for those sitting toward the back of the pack, the Fed and BoE, what are the chances the divergence persists or even grows? One of the clearest takeaways from seeing policy rates aggregated in this way is just how synchronized they are (and this goes back further than what I’m showing here).
By synchronized I don’t mean coordinated. It’s not as if they all text each other every six weeks to get their stories straight, then execute a deliberately organized strategy. There is constant communication, of course, yet each central bank does operate independently. And yet, they all make largely the same decisions at roughly the same times anyway.
There is no getting away from how this is global system even central banker policies, a profound fact and statement which means for the Fed and the BoE (and anyone else up to and including BoJ) they’re going to end reacting to those same global factors the others already are, and then acting on them similarly. It always comes down to time and timing, not what and where.
As central banks are doing just what we’d thought they would, market signals looking ahead point to more from the race to the bottom. More importantly, why. Stocks have sold off sharply again today, with the S&P 500 the latest to enter correction territory. It’s not so much the downside as it is the clear absence of dip buying.
The idea itself is everywhere, with nary a talking head refraining from the recommendation. Yet, in that actual market it hasn’t materialized, at least not to this point. That is another growing signal of how stock investors are taking the macro risks of a traditional recession more seriously than at any time since maybe 2022.
ONE OF THE BEST EXAMPLES YOU’LL EVER SEE.
Gold soared above $3,000 for the first time ever. While many people still hold the idea somehow that’s an inflationary signal, it is nothing of the kind. Instead, it is the same as the central bank race as well as why bond yields have been leading it for years; or the dollar which is far “stronger” than anyone gives it credit for (also detailed yesterday).
Put all these signals together, then add the various macro datapoints from around the world and labor markets (yep, America’s, too), central banks cutting more than people think, interest rates sinking ahead of them, stocks selling off in determined macro fashion, gold safety soaring to unheard of heights. That’s not inflation.
It is what it was it was always going to be. The 2020s, sadly, are going to look too much like the 2010s. If we are unlucky, they could turn out to be somehow worse (that whole impoverishment thing will have had a lot do with it, I suspect). What we’re trying to figure out is how we get there, not really if.
That’s basically the only positive aspect of so many global central bank rate cuts, the tiniest silver lining. Their race to the bottom is simply more confirmation.
