...but money is still cheap!

Macro Perspectives

The market continues to react to a higher interest rate world.

In addition to the Fed move, the Swiss National Bank raised rates by 50 basis points yesterday morning. Just this month; Australia has raised by 50 bps, The Bank of England raised for a fifth time in a row, Canada raised by 50 bps.

This all sounds pretty aggressive, until you realise that not one of these central banks has taken rates above 2%. Two other major economies (Japan and Europe) continue with negative interest rates.

And the average inflation across these countries: 6%!

If we average the central bank determined interest rate for this group, it's now a whopping +0.6% - again, to address 6% inflation.

Remember, the inflation fight of the 70s and 80s both required taking interest rates ABOVE the rate of inflation to beat it. And also remember, this current inflation challenge was visible from the very beginning of the policy response - dating back to the second quarter (if not March) of 2020.

These central banks were not taken by surprise (at least they shouldn't have been).

If we couldn't connect the dots on what happens when we shut down economies, print money and subsidise consumers and businesses to stay at home, then we could surely see the inflation in our daily lives by early 2021. And if that didn't work, we could see it in the multi-decade high inflation data presented to us through a variety of monthly reports (again, more than a year ago).

Bottom line: This continues to look like a "tough talk" strategy to slow economies and to kill animal spirits. It's working. But money is still cheap and the signals the central banks are giving (from their actions, not words), should give us confidence that its going to remain cheap.