September 14, 2015

What Happens When Central Banks Hike Rates In The "New Normal"

Ten days ago, using Bank of America data, we summarized what it means to live in the New Normal: "In the 110 months [since the last Fed hike] global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero [or negative] interest rates policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime."

Indeed, what has happened in the past 7 years is nothing short of the greatest attempt ro reflate asset prices (if not so much the economy - that will come when the helicopters start paradropping bags of cash) the world has ever seen, driven entirely by the central banks and China. In fact, it is now so obvious even JPM finally figured it out.

However, while the desperate attempt to monetize a quarter of global GDP in tradable assets just to boost the confidence (and wealth) of the "1%" is no longer lost on anyone, the reality is that some banks did try to tighten monetary conditions and hike rates.

This is how they fared. According to the WSJ: "In the seven years since the world’s central banks responded to the financial crisis by slashing interest rates, more than a dozen banks in the advanced world have tried to raise them again. All have been forced to retreat."

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