Central Banks Up Interest Rates, Up Chaos—Damned if They Do, Damned if They Don’t
June 16, 2022 (EIRNS)—Today more central bank interest rates were hiked, following the 0.75% rise announced by the Federal Reserve yesterday. The Bank of England raised its rate by 25 basis points, up to 1.25%, for its fifth consecutive hike under its stated policy of fighting inflation “forcefully,” according to today’s Bank of England statement. The Bank of Japan met today, for the beginning of its two-day meeting, and speculators expect it to raise rates, too.
The Swiss National Bank raised its interest rate by 0.5% today, meaning its interest rates are merely negative by 0.25%. This is the Swiss National Bank’s first increase in rate since 2007, and termed a “shock move” by Reuters. The Swiss labor federation has denounced it for hurting wages and jobs.
The financial media are covering the follow-on. The Dow closed down today almost 750 points, sinking below 30,000; the Nasdaq dropped by more than 4%.
The Wall Street Journal reports on how a Japanese interest rate rise could “trigger substantial turbulence in global markets,” pointing to similar “unwindings” in the 1990s and in 2008. Another article, cheerfully headlined “Asia Will Feel the Fed’s Wrath, Too,” foretells that companies in South Korea, Thailand, and elsewhere that took on cheap debt will now be in trouble, unable to service or pay it. Thus, higher interest rates could “wreak havoc on local economies.”
Japanese currency and bonds are under major speculative attack. The Wall Street Journal reports how hedge funds are pulling out of the yen carry trade (that of buying low-yield yen, to invest in higher-return assets), which has been one of Wall Street’s biggest “trades.”
In the United States, the tightening effects go on. The rate for 30-year mortgages has risen above 6%, according to the Mortgage Daily Report, after the largest weekly jump since 1997. Freddie Mac puts it lower, at 5.78%, which still is the highest since 2008. Housing starts are down 7% month on month, and down 14.4% year on year. The drop will continue.
Other effects are dramatic. For auto loans, sub-prime sales are dead in the water, the Financial Times reports, and so, “a whole swath of consumers are just not going to be able to get cars.”