- May 6, 2022
- Posted by: Bastion team
- Category: World News
AS CENTRAL BANKS do battle with the worst inflation for a generation, they are putting the easy-money policies of the past decade into reverse. This week the Federal Reserve raised interest rates by half a percentage point and announced that it would soon shrink its portfolio of bond holdings. The Bank of Australia, which not long ago was predicting it would keep rates near zero until 2024, surprised investors by increasing them on May 3rd by a quarter-point. As we published our weekly edition the Bank of England was expected to raise rates to their highest level since 2009.
Though share prices jumped after the Fed’s rate rise—in apparent relief that it is not tightening faster—financial markets have been adjusting painfully to the reality of tighter money. Global stockmarkets fell by 8% in April and are down by 11% in 2022, as investors price in higher rates and lower growth. On May 2nd America’s ten-year Treasury yield, which moves inversely to prices, briefly hit 3% (see chart), nearly double its level at the start of the year.
One consequence of tightening financial conditions is a repricing of currencies. The dollar is up by 7% against a basket of currencies over the past year. America needs higher interest rates than any other big rich country, because of its overheating economy and labour market. Higher rates in America increase investors’ appetite for dollars, adding to dollar-demand caused by a fall in their desire to take risk elsewhere as war rages in…