When the Federal Reserve Board cuts US interest rates this week, Japan’s will be the only major central bank moving in the other direction. That could lead to more turbulence.
. With one notable exception, the world’s major central banks will be simultaneously loosening monetary policies that have been kept tight since the post-pandemic inflation breakout in 2022.
Since March 2022, the federal funds rate has soared from its pandemic nadir of near-zero to 5.33 per cent, where it has held since July last year. Indeed, it already has. In August, weak job numbers in the US, which increased the likelihood of a rate cut, ignited chaos in global markets. Sharemarkets around the world were heavily sold off, commodity prices slumped, bond yields tumbled and there were wild fluctuations in currency markets.
The sudden compression in the bond spreads between Japan and the US ignited a panicked unwinding of at least some of those trades, probably the more leveraged of them. “It is part of the bigger picture – the inevitable withdrawal symptoms that markets suffer as they transition away from the extraordinary period of exceptionally low interest rates and ample liquidity,” he said.
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