Interest rates rise, markets correct
Digital technology has also connected globalized supply chains like never before, uncovering efficiencies and delivering cheaper goods and services to people around the world.
Stock markets shaken by extremely low interest rates come up against the 7% annual rise in consumer prices in the United States.
But, by disrupting these supply chains, the COVID-19 virus has caused shortages which, in turn, drive up the price of goods and services. It now threatens to sink into the labor market and continue, forcing central banks to prematurely end the age of ultra-cheap and plentiful money.
Basically, there is something wrong with pricing silver at zero or negative rates. Interest rates should reward those who delay gratification now to enjoy it more in the future.
Stock markets turbulent with ultra-low interest rates are coming up against the 7% annual rise in US consumer prices and the impending tightening of monetary policy by the Federal Reserve to control inflation.
Factoring in rising interest rates turns the crypto boom into a bust and will now test what kind of store of value, or medium of exchange, or hedge these digital assets really are.
Ultra-low rates push forward the pricing of expected eventual profits for tech companies, including tech platform companies, as they gather enough eyeballs. Thus, the sell-off is strongest for tech stocks that have been inflated closest to the sun by cheap money.
Market reactions – such as Wall Street’s “tantrum” in 2013 that led former Chairman Ben Bernanke to back down from plans to end Fed QE – have delayed the normalization of monetary policy.
But ahead of Thursday’s monthly statement on monetary policy, Fed Chairman Jerome Powell is expected to stick to the announced start of interest rate hikes to rein in soaring inflation.
Today’s quarterly consumer price index is expected to show that Australia’s core annual inflation rate is within the Reserve Bank of Australia’s target range of 2-3%.
With the unemployment rate at 4.2%, it seems frankly absurd that the central bank is keeping its cash rate at an all-time high of 0.1%. It needs to normalize.