Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

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

© 2005-2022 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