In March, the Federal Reserve looks set to raise interest rates in the face of high-flying inflation. If it follows through, it will be far from the first central bank to finally tighten policy since the pandemic began. But it also won’t be the last.
With the Bank of England having already moved on higher interest rates — but the European Central Bank likely to wait until the end of the year to raise rates — the Federal Reserve finds itself in the middle of the pack on attempting to pull its pandemic-era stimulus.
It appears that all of the major central banks are now taking a “hawkish” stance, referring to a tilt toward higher borrowing costs as opposed to the “dovish” stance of wanting to keep rates low.
“The Fed is no longer on the dovish end of the spectrum, but it is not very hawkish relative to its G10 counterparts either,” wrote BofA Securities’ economics team over the weekend.
Last week, the Bank of England’s nine-member committee voted 5-4 to raise short-term borrowing costs to 0.5% (with the minority supporting a more aggressive interest rate increase).
And although many expected the European Central Bank to swat down talk of any rate increases this year, President Christine Lagarde last week did not entirely rule out a 2022 hike.
The Fed, meanwhile, appears to be messaging a 25 basis point rate increase in its next meeting in mid-March. But a hot jobs report that blasted through gloomy expectations of an Omicron hit is again adding fuel to conversation over the possibility of a more aggressive Fed rate hike.
The divergence in timelines among major central banks to “normalize” policy has injected some volatility into global asset pricing.
“We don’t think the bumpy ride is over,” UBS Head of Equity Derivatives Research Stuart Kaiser told Yahoo Finance Monday.
Fed remains the leader
The recent commentary from the ECB has had the most notable impact on sovereign debt and foreign exchange markets, where German bond yields spiked on Lagarde’s suggestion that the ECB is not locked into its current interest rate setting for the rest of the year.
The hawkish tone boosted the Euro, which appreciated against the dollar about 1.50% after the ECB decision. Strategists say the Swiss franc and the Japanese yen, controlled by more dovish central banks with a tendency to shy away from rate increases, could see more depreciation against the global hiking cycle.
And although the Fed lags the likes of the Bank of England and several emerging economies in launching rate hikes, analysts say the strength of the U.S. dollar maintains Fed Chairman Jerome Powell as the world’s most important central banker.
“The Fed is still likely to lead the hawkish re-assessment of central bank policy underway around the world,” ING Economics wrote.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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