Reversion to reality continues. Last month, the US Federal Reserve, the European Central Bank and the Bank of England all raised rates by 0.75%. After more than a decade of nonsense, all are now perfectly synchronised. Is this because it is so obviously the right thing to do or are the latter two so inept they’ve simply decided to follow the Fed? It’s not that the Fed’s reputation isn’t also in tatters but as the dollar is the world’s reserve currency, it was always likely to be its responsibility to take the lead. The rate hikes might have been the same in absolute terms but in percentage terms, they differ. Using the highest targeted rates in the US, UK and Eurozone, the price of money is now 4%, 3% and 2.25%, respectively.
Fed Chairman Powell noted “The question of when to moderate the pace of increases is much less important than the question of how high and how long to keep monetary policy restrictive.” Which means he doesn’t know what the future holds but he’s not in favour of cutting too early, thus opening the door for inflation to return. As Mr Powell noted recently, we are now finding out how little we actually know about inflation. Well, better late than never but it’s just another illustration of the mess central banks have made of their core responsibilities. Where we can find investments we truly want at prices we wish to pay, we will act. If not, we’ll retain cash until we do.
