The Fed and the ECB turn on a dime

The multi-trillion dollar world of central banking has just turned on a dime. A week ago the Fed was expected shortly to raise interest rates by half a percentage point. The European Central Bank (ecb) had just announced an end to its bond purchases. The Bank of Japan was unusual in its commitment to maintaining monetary stimulus despite growing disquiet about the plummeting yen. By the time our weekly edition was published, however, the Fed had raised rates by three-quarters of a point; the ecb had held an emergency meeting and said it was working on a new tool to intervene in bond markets; and the Bank of Japan, ahead of its meeting on June 16th-17th, had joined the government in lamenting the yen’s weakness.

Turmoil in policy has coincided with tumult in markets. Tighter monetary policy has been crushing American stocks, which are down by almost 20% from their January peak. Cryptocurrencies are crashing, eviscerating investors who were late to the party. The spread between ten-year yields on safe German debt and risky Italian debt reached over 2.4 percentage points the day before the ecb’s announcement. Bond yields have risen and traders have punished currencies, like the yen and sterling, issued by central banks that are unlikely to keep pace with the Fed.