The Federal Reserve is starting the first phase of its gradual path to remove monetary policy support.
Something quite different is happening in the halls of central monetary authorities from Latin America to Eastern Europe, Africa and even some developed-market countries.
In January of 2021, I wrote a half-joking, half-serious, and said that the 300-basis point interest rate hike by the Bank of Mozambique was a sign of things to come.
It was the first interest-rate hike in four years in the country, and came in response to a substantial upward revision of its outlook for inflation.
10 months ago. I made a live thread about the global policy pivot from rate cuts to rate hikes.
If this was just one rate hike by one central bank, it might not even warrant a mention, but it is hard not to notice a pattern. The chart below does a good job of mapping that pattern.
It shows the proportion of central banks in rate-hike mode.
Why hike now?
There are a few reasons why countries around the world are raising rates.
We went from a topic of few people talking about inflation at the start of the year to a hot topic in the last few months.
Base effects, bounce backs, and strong demand combined to drive a shift in inflation and inflation expectations.
Emerging economies are sensitive to inflation. In recent times, they have seen an annual rate of inflation that is twice what you would see in developed economies.
Think about the average emerging market central bank governor 20 years ago. Runaway inflation influenced their formative years.
Many central banks have lifted rates in order to prop up their currencies as the U.S. dollar strengthens. The line of reasoning is that higher inflation means a fundamentally weaker currency, and higher interest rates appeal to carry traders looking to bank the higher yields: bringing flows and lifting demand for a country's currency.
If you keep rates too low for too long, you risk sparking asset-price bubbles, which can cause financial instability.
The developed-economy housing market valuations have sailed past the pre-financial crisis highs, so we should pay more attention to this aspect.
Ultra-low borrowing costs have helped push housing market valuations in some countries well above pre-financial crisis levels.
Expect less of a tailwind for risk assets, upward pressure on borrowing costs, and likely more volatile markets going forward.
Market impact.
With the global policy pivot to rate hikes, investors can expect less of a tailwind for risk assets, upward pressure on borrowing costs, and more volatile markets going forward.
The chart below shows how a shift from easing to tightening can mean a leveling-out or regime shift in the market.
You might be wondering if the S&P500 has something to do with the random small, emerging-market central banks hiking interest rates.
The post-financial crisis period when the eurozone debt crisis was raging and weighing on global investor sentiment was where much of the volatility in U.S. markets was triggered.
The bigger issue is the common themes motivating monetary policy.
The central bank has its own set of circumstances, but the common theme is a reaction to higher inflation, stronger growth and a desire to avoid over-cooking markets.
The forces that triggered the rate hike in Mozambique are the same ones that will eventually cause the Fed to stop supporting the economy.
It may take time, but one thing I know to be true is that these things go in cycles.
Topdown Charts is a global asset allocation and economics research firm.
What a Fed led by Powell and Brainard means for Americans.
Why it matters to you that Powell will serve another term as Federal Reserve chair.
