Central bankers around the world are enacting what could be the most dramatic tightening of monetary policy since the 1980s, risking recessions and upsetting financial markets as they try to deal with an unexpected spike in inflation. The week began with a surprise move on Wall Street to price in a Federal Reserve rate hike of 75 basis points. Chairman Jerome Powell declared himself fully committed to bringing inflation back down, the greatest step by the US central bank since 1994.
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KEY POINTS:
- Switzerland surprisingly boosted rates, while the Bank of England raised rates for the fifth time, this time by 25 basis points, and indicated that it will soon double the rate.
- The bond market’s reaction to the coordinated removal of stimulus was so ferocious that the European Central Bank called an emergency meeting on Wednesday to address rising yields in some euro-zone countries.
- Borrowing costs have risen in emerging markets from Brazil to Taiwan to Hungary, with Australia, South Korea, India, New Zealand, and Canada among those planning further action.
- Only the Bank of Japan defied the trend, keeping its ultra-easy monetary policy despite intense market pressure to jump on board the global bandwagon.
- Expectations of higher inflation in the United States boosted 75 basis points. The Federal Reserve is raising interest rates.
- China is an exception, but traders around the world are ready for a series of rate hikes that many will have never seen before in their lives.
- The Federal Reserve expects to raise its benchmark rate to 3.8 percent by the end of 2023, up from the 1.5 percent to 2% range it reached last week, and numerous Wall Street firms predict an even higher peak.
Part of the reason policymakers are being pushed to intervene is because they failed to recognise the tenacity of inflation’s ascent to multi-decade highs. Even when they realised that the price pressures were not “transitory,” they were hesitant to respond. The year 2022 began with interest rates in the United States remained around zero and the Federal Reserve swallowing up Treasuries and mortgage-backed assets.