(Bloomberg) –Federal Reserve Chairman Jerome Powell fired the starting gun for potentially the biggest and fastest tightening of global monetary policy in years.
His hawkish shift included not ruling out U.S. rate hikes at every meeting for the rest of 2022. Over the next week, about a half dozen other central banks, including the Bank of England, are set to raise their own benchmarks, and more have indicated they will follow in the coming months.
Powell’s comments were a major warning for investors that the central bank comfort blanket is really being taken away this time. Even with equities wobbling, bond yields rising and concerns mounting that higher borrowing costs will dent growth, the Fed chair didn’t blink.
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With monetary guardians making clear the scale of their concern about inflation, the path has been laid for aggressive action.
“This tightening cycle will be different,” said Dario Perkins, an economist at TS Lombard in London. “The authorities may want to hike interest rates much quicker this time around.”
The last global cycle was shortly before the 2008 financial crisis, but this time it starts with economies already at full capacity and inflation way above target — setting up the prospect of the most rapid global rate hike cycle since the 1990s, Perkins said.
With price growth at 30-year highs in the U.S. and U.K., markets expect the Fed to raise rates five times this year, and the BOE four. The latter is expected to announce its second increase in a row — to 0.5% — next week.
That level also triggers the possible start of unwinding of quantitative easing, adding another layer of policy tightening.
At BNP Paribas, global chief economist Luigi Speranza also expects that it’s a case of “this time is different.” He’s now predicting six Fed hikes this year.
The tightening trend is evident almost everywhere. Bank of Canada governor Tiff Macklem signaled Wednesday that he will increase rates in March, and investors are pricing in more after that.
South Africa raised borrowing costs on Thursday, while Hungary also increased rates. Singapore unexpectedly tightened policy this week and Chile delivered its biggest rate hike since 2001.
Australia is expected to scrap its bond buying program next Tuesday and could lift rates as early as May.
The global shift toward tightening will pile pressure on the European Central Bank, which remains an outlier and unlikely to hike before 2023. China is also going against the grain, cutting interest rates to support economic growth.
Previous guidance from the BOE and others that rate rises when they come will be “limited and gradual” is beginning to look like a relic from a different era. Powell repeatedly said that “the economy is quite different this time” and that policy will need to be “nimble”.
Perkins said financial markets should brace for a bumpy ride.
“Inflation is well above target, the economy is already close to full employment and asset valuations look stretched,” he said. “Unless the equilibrium interest rate has collapsed — which seems unlikely — the authorities might need to tighten policy more forcefully than investors realize. This poses clear risks to the financial sector.”
Rapid tightening will heighten concern that central banks are heading for a painful policy mistake.
Perkins compared the looming cycle to former Fed chairman Alan Greenspan’s “stand up and be counted moment in 1994 … when central banks tried to tighten financial conditions more forcefully.”
That policy “quickly backfired” as growth dipped, he warned.
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