10-06-2024, 11:19 AM
Linette Lopez
Jun 9, 2024, 5:47 PM GMT+8
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For the past four years, the world has been unified in its efforts to first ease the economic pain caused by the pandemic and then combat the historic bout of inflation that followed.
......
But now, the world risks falling out of sync.
......
reality has been making a mockery of experts' assumptions all year long. Wall Street started the year expecting inflation to cool off, the economy to slow to a more leisurely pace of growth, and as many as six interest rate cuts from the Fed. Instead, inflation data has consistently come in hot, and the US economy's strength has defied expectations. This combination means there's a good chance that the September cut Wall Street is praying for may never materialize.
......
If the Fed doesn't cut come fall, America's high interest-rate regime will be out of step with the rest of the world. And any differential between the US and the rest of the world would send a weird wave of money crashing onto America's shores. That sudden surge of cash could, in turn, add liquidity to our financial system just as the Fed is trying to dry it up and push up prices around the economy. This would make it even harder for the Fed to ease, further diverging US policy from the rest of the world. Think of it as a vicious cycle
......
At a time when economies in Europe and elsewhere are losing momentum, sucking more money away from these economies will tighten financial conditions while they're trying to avoid a slowdown — especially in crucial regional data like German industrial production, which has come in soft of late. It will also weaken the euro, which will make it harder for the continent to import the energy it needs to fuel its economy and make it more expensive to buy American goods. And in Asian economies, where interest rates are already significantly lower than in the US, things could get even messier.
"We expect that Japan and South Korea will face challenges balancing monetary policy to maintain stability as the dollar appreciates," Nigel Green, the CEO of deVere Group, a global wealth-management firm, told me. "I wouldn't be surprised if policymakers feel the need to intervene in the currency markets or adjust interest rates to manage these effects."
For the US, more money sloshing onto America's shores has the opposite impact of what the Fed wants to achieve: It pushes up asset prices and loosens financial conditions. In other words, it makes it harder for the Fed to fight the inflation that is aggravating consumers.
......
there's a way for the Fed to fight back: hiking interest rates some more. But jacking up interest rates even further could finally break the back of the until now strong US consumer and send us into a recession. It's the same calculation the ECB is making, though the EU's slowdown is more marked. Given these downsides, the Fed is unlikely to hike, which will create the perfect market for the carry trade to thrive. And as long as US data remains choppy — pointing to sticky inflation one day and disinflation the next — this carry-trade cash will end up sloshing around in the economy. This is a dynamic that central banks from countries already on their rate-cutting path will be watching. They're already seeing growth slow and, on top of that, will have money sucked away to the US, where data has been relatively strong through the first half of the year. Carry-trade cash exploits the dislocations between global economies that are keeping our policies from coordinating.
MUCH BETTER TO READ FULL ARTICLE: https://www.businessinsider.com/america-...n%20abroad.&text=We%20are%20once%20again%20at,global%20markets%20could%20turn%20violent.
Jun 9, 2024, 5:47 PM GMT+8
......
For the past four years, the world has been unified in its efforts to first ease the economic pain caused by the pandemic and then combat the historic bout of inflation that followed.
......
But now, the world risks falling out of sync.
......
reality has been making a mockery of experts' assumptions all year long. Wall Street started the year expecting inflation to cool off, the economy to slow to a more leisurely pace of growth, and as many as six interest rate cuts from the Fed. Instead, inflation data has consistently come in hot, and the US economy's strength has defied expectations. This combination means there's a good chance that the September cut Wall Street is praying for may never materialize.
......
If the Fed doesn't cut come fall, America's high interest-rate regime will be out of step with the rest of the world. And any differential between the US and the rest of the world would send a weird wave of money crashing onto America's shores. That sudden surge of cash could, in turn, add liquidity to our financial system just as the Fed is trying to dry it up and push up prices around the economy. This would make it even harder for the Fed to ease, further diverging US policy from the rest of the world. Think of it as a vicious cycle
......
At a time when economies in Europe and elsewhere are losing momentum, sucking more money away from these economies will tighten financial conditions while they're trying to avoid a slowdown — especially in crucial regional data like German industrial production, which has come in soft of late. It will also weaken the euro, which will make it harder for the continent to import the energy it needs to fuel its economy and make it more expensive to buy American goods. And in Asian economies, where interest rates are already significantly lower than in the US, things could get even messier.
"We expect that Japan and South Korea will face challenges balancing monetary policy to maintain stability as the dollar appreciates," Nigel Green, the CEO of deVere Group, a global wealth-management firm, told me. "I wouldn't be surprised if policymakers feel the need to intervene in the currency markets or adjust interest rates to manage these effects."
For the US, more money sloshing onto America's shores has the opposite impact of what the Fed wants to achieve: It pushes up asset prices and loosens financial conditions. In other words, it makes it harder for the Fed to fight the inflation that is aggravating consumers.
......
there's a way for the Fed to fight back: hiking interest rates some more. But jacking up interest rates even further could finally break the back of the until now strong US consumer and send us into a recession. It's the same calculation the ECB is making, though the EU's slowdown is more marked. Given these downsides, the Fed is unlikely to hike, which will create the perfect market for the carry trade to thrive. And as long as US data remains choppy — pointing to sticky inflation one day and disinflation the next — this carry-trade cash will end up sloshing around in the economy. This is a dynamic that central banks from countries already on their rate-cutting path will be watching. They're already seeing growth slow and, on top of that, will have money sucked away to the US, where data has been relatively strong through the first half of the year. Carry-trade cash exploits the dislocations between global economies that are keeping our policies from coordinating.
MUCH BETTER TO READ FULL ARTICLE: https://www.businessinsider.com/america-...n%20abroad.&text=We%20are%20once%20again%20at,global%20markets%20could%20turn%20violent.