So is this really it: the end of the era of virtually zero interest rates? There was a marked pullback in US markets on Wednesday when Jay Powell, the chair of the Federal Reserve, indicated that yes, he really did mean it: interest rates are on the way up, if not quite yet. ‘The committee is of a mind to raise the federal funds rate at the March meeting assuming that conditions are appropriate for doing so.’ Share prices, which earlier in the day had risen in expectation of a doveish stance, fell back sharply. The very idea that a central bank might increase interest rates to tackle rising inflation seemed to catch investors unaware – so used have we all become to ultra-low borrowing rates.
But I’m not sure I would really want to bet on rates rising in March. There was still a lot of wriggle room in Powell’s words. Over and over again during the past decade central bankers have told us that they would raise rates when conditions were right, but then they have never seemed to be quite right. Central bankers have acted like boozers who are always telling you that that they will give up drinking tomorrow, but come the day there is always a reason to have another drink.
It is not difficult to construct a scenario in which conditions might rapidly deteriorate. What if Putin’s tanks really do roll over the border, Russia is hit with sanctions and it retaliates by cutting off Europe’s gas, sending global prices soaring higher? Then comes another Covid variant shock. And the housing market is threatening to follow the Nasdaq into the abyss, taking banks with it. Is the Fed going to want to jack up rates in the face of all that? Or is it going to say: no, let’s hang on a bit. It will be easy to say: the economy is going to need a bit of stimulus in the face of all this – so rather than wind in quantitative-easing, let’s just have one more round.
That is the era we live in: one in which the economy habitually gets pumped with stimulus at the first sign of economic danger – sending asset prices flying, enriching those with assets while those with no assets struggle on. One day, presumably, it will be over. But so much have investors enjoyed the zero interest rate era, that it would be brave to call an end to it yet. Don’t be surprised, then, if, come March, the world is in panic mode once more – and investors are quietly enjoying themselves again.