Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

© 2005-2019 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