It would seem that the emperor has no clothes. In the last few weeks, markets have begun to act as though they no longer think the Fed’s strategy is credible. Same goes with the world’s other interventionist central banks.
The sole purpose of global central bank monetary policy in the last five years has been to keep rates low. The theory goes that low rates will encourage borrowing, which will encourage spending and that, in turn will strengthen the economy. The big problem? It hasn’t worked yet, and it appears that market participants may be thinking that it never will.
Take a look at movements in global markets of late. You can see on the chart below that TIPS yields are skyrocketing. If the goal of the Federal Reserve is to keep real rates down, the Fed is failing.
Now take a look at the Nikkei and the yen on our next two charts. After the Bank of Japan dumped an ocean of money on the market, stock prices took off. But recently it would appear as though the market has lost faith in the government’s commitment to stimulate.
The stunning market volatility can be seen in the currencies of South Africa and India as well. Both have taken nosedives compared to the US dollar in recent weeks.
The volatility in global asset markets suggests that either the market has lost faith in the power of central banks or investors have already fully discounted QE-infinity, making the recent volatility even more terrifying.