Shock Interest Rate Hikes Stun Markets

FOMC Chairman Powell answers a reporter’s question at the press conference. June 13, 2018.

According to David Stockman, persistent, large interest rate hikes have given Wall Street the opposite of what it was praying for. Even dovish Sweden has turned toward shocking rate hikes. He writes (abridged):

The Great Central Bank Pivot is now underway around the globe, but it’s not the one Wall Street has been praying for. Instead of another round of easing juice to brake the obvious fall in economic activity, central banks en masse are racing to goose interest rates by 75 or even 100 basis points at a clip in order to quash the inflation surge.

Just yesterday, for instance, the heretofore dovish Riksbank of Sweden raised its target rate by 100 basis points, shocking the market. Not that long ago, by contrast, the Swedish central bank appeared to be locking into zero interest rate (ZIRP) policy forever.

The Riksbank’s action, therefore, is symptomatic. Global central banks have been chasing the chimera of “lowflation” for years now. So doing, they flooded the financial markets with massive amounts of excess liquidity and credit, while getting further and further behind the curve on the inflation that was implicitly building in the system.

As a reminder, the combined balance sheets of the world’s central banks stood at $4.7 trillion in 2003 and now total nearly $43 trillion. That gusher of liquidity, in turn, set the monetary table for soaring inflation–first in financial asset prices, and now in goods and services owing to commodity market disruptions triggered by Washington/NATO’s unhinged Sanctions War against Russia and the Covid-induced ructions in the global supply chains.

So central banks have pivoted nearly on a dime, switching from stimulating more inflation to a desperate attempt to quell inflationary pressures that are fast becoming embedded in the wage cost structure.

David Stockman’s Contra Corner.

Read more here.