Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
Elliott Wave Theory: Is Elliott’s Theory Enough? - 27th Apr 17
Billionaire Investor Paul Tudor Jones Says Stock Market Valuation Is “Terrifying” And He Is Right - 26th Apr 17
The Great BrExit Divides - Britain, USA and France - 26th Apr 17
10 Facts That Show Our Taxes Are Worse Than You Thought - 26th Apr 17
What Trump’s Next 100 Days Will Look Like - 26th Apr 17
G20: SURPASSING THE 2nd GLOBAL STEEL CRISIS - 26th Apr 17
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17
Can Marine Le Pen Win? French Presidential Election Forecast 2017 - 21st Apr 17
Why Stock Market Investors May Soon Be In For A Rude Awakening - 21st Apr 17
Median US Household’s Wealth Has Declined by 40% Since 2007 - 21st Apr 17
Silver, Platinum and Palladium as Investments – Research Shows Diversification Benefit - 21st Apr 17
U.S. Stock Market and Gold, Post Tomahawks and MOAB - 21st Apr 17
An In Depth Look at the Precious Metals Complex - 20th Apr 17
The Real Story of China’s Strong First-Quarter Growth - 20th Apr 17
3 Types Of Life-Changing Crisis That Make You Wish You Had Some Gold - 20th Apr 17
The Truth is a Dangerous Thing - 20th Apr 17
2 Choke Points That Threaten Oil Trade Between Persian Gulf And East Asia - 20th Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

Where the Fed Goes, Other Central Banks May Not Follow

Interest-Rates / Central Banks Mar 20, 2017 - 12:19 PM GMT

By: STRATFOR

Interest-Rates

It has been a busy couple of days for the world's central banks. Since the U.S. Federal Reserve made its decision to hike interest rates, rate announcements have followed from the People's Bank of China, the Bank of Japan, the Swiss National Bank and the Bank of England. This confluence of activity from most of the key guardians of the global economy provides a good opportunity to take stock of where things stand.


The Federal Reserve had telegraphed its intent to raise its benchmark rate well before Wednesday's announcement, so it came as no surprise. In the past few weeks, various Fed governors had conducted a coordinated speaking campaign to prepare the markets, and Friday's report showing strong U.S. jobs numbers removed its last impediment to action. With recent U.S. economic data generally robust, the Fed wants to give itself room to boost rates two or possibly even three more times during the year.

Although the dollar dropped in the wake of the announcement, the hike should buoy the currency in the medium term as the divergence between U.S. interest rates and those of its peers brings money flowing into the United States. Other central banks are thus faced with a choice: Do they track U.S. actions to protect their currencies, or do they stand pat and take their chances?

The People's Bank of China chose the first path. With capital flight already a major issue, the Chinese bank boosted its interbank rate to try to stay as close to U.S. rates as possible. The Bank of Japan, which favors a weaker yen, chose to leave its policy unchanged, no doubt less worried by the prospect of interest rate divergence. The same can also be said for the Swiss and English central banks, which both left their policies unchanged. Switzerland generally faces a perennial struggle to keep a lid on the franc's value, while the United Kingdom is currently attempting to stimulate exports, making it less keen to maintain a strong currency than in recent decades.

Below the surface of the central banks' moves, or lack thereof, lurks the question of inflation. Controlling prices is the sole mission of almost every major central bank (the Fed has a dual mandate that also includes managing unemployment), so inflation numbers are the true drivers that shape monetary policy over time. Following several years in which central banks had to battle deflation, inflation has returned to the developed world over the past 12 months, and this has changed the tendency among central banks from further monetary easing to tightening.

But this inflationary trend appears to rest on weak foundations. The first sign of the turnaround in prices emerged last year in China, where falling commodity prices since 2012 had created an ongoing drop in production prices, which manifested around the world as consumers bought cheaper Chinese products. As commodity prices stabilized last year, driving Chinese production prices up for the first time in four years, they helped create the reflation narrative that seized global markets. (The rises and falls in commodity prices also directly affect each country's inflation figures, not just through China.)

But inflation driven by commodity price increases is less sustainable than that caused by wage pressures. If commodities reverse, the inflationary gains would rapidly evaporate, leaving central banks back where they started at the start of 2016. On March 8, China released figures for February that showed producer prices accelerating at their fastest rate in nearly nine years. But this news came as the Brent oil price was in the midst of a sharp fall, dropping below $51 for the first time since November. Thus, while Chinese price trends still seem strong, their underlying support appears to be somewhat soft.

Meanwhile, the United States continues on a path partly of its own. The U.S. executive branch is committed to actions that would stimulate the economy. It is pushing for tax cuts and increased infrastructure spending — the kinds of policies that would boost wage pressures and make for sustainable inflation. Those ideas face uncertain futures, however. The president and Congress have not yet aligned on what tax reform should look like, for example, but it seems likely that at least some form of corporate tax cut will make it through the legislative process by the end of the year. This, in turn, could influence the Fed to maintain a clear tightening path as the rest of the world comes down off the commodity price bounce and starts to think about loosening monetary policy again.

The last time the world's central banks sharply diverged from the Federal Reserve came after the Fed increased its benchmark interest rate in December 2015, its first increase since 2008 (Wednesday's hike was its third). That divergence led to a two-month period of drama in global financial markets, with sell-offs hammering weak points such as Italian banks and Chinese capital outflows markedly increasing. That period came to an end after central banks apparently coordinated their policies to reduce the divergence. This time around, with strong pressures pushing the actors in different directions, such an alignment would be harder to achieve.

"Where the Fed Goes, Other Central Banks May Not Follow is republished with permission of Stratfor."

This analysis was just a fraction of what our Members enjoy, Click Here to start your Free Membership Trial Today! "This report is republished with permission of STRATFOR"

© Copyright 2017 Stratfor. All rights reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.

STRATFOR Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife