After a decade of monetary stimulus, central banks have pledged to exit loose monetary policy. Except for the Fed, their attempts appear to be failing.
The Federal Reserve has been raising interest rates, bringing 2-year yields up to around 2.5% and reacting to the Trump Administration’s fiscal stimulus, the largest on record during a peacetime expansion. However, long-end Treasury yields remain flat to the short-end, while Bunds, JGBs and Gilts stay near record lows. Eurozone CPI YoY inflation has fallen to 1.3%, below the ECB’s year-end forecast of 1.5%; Bank of England Governor Carney dropped the ball on a rate hike in May; and the Bank of Japan removed its 2% inflation target for 2019. While the Fed was supposed to lead policy normalisation, it now looks like it has driven the train out the station before the other central banks could get on it.
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