OZY+GRI: Could this interest rate cliff-edge cripple the US economy?
GRI is pleased to present a new collaboration with innovative news provider OZY. We’re kicking things off with a series of five articles by Senior Analyst Jeffrey Moore, looking at Black Swan events.
After a strong January, the stock market got a case of February jitters when newly nervous investors began to wonder what a hike in interest rates could mean for future interest rate policies at the Federal Reserve, especially under the new leadership of President Trump’s nominee, Jerome Powell.
Not that the bump came as a surprise. After all, the world’s most influential central bank has been saying for years that it will remove the economic stimulus measures known as quantitative easing that have been in place since the 2008 financial crisis and hike rates as soon as its inflation targets of 2 percent are satisfied.
It now appears that inflation is on the move — 2.2 percent in February, according to the producer price index. The market brushed aside the news, but some anxious investors are wondering what happens if inflation starts to gallop ahead of the target? Central banks have worked for years to stoke inflation: What if they finally get more than they bargained for?
Out-of-control inflation is a gray rhino — a high-impact, negative occurrence that is rationalized until it is too late. The government’s response, though, could lead to a true black swan: a low-frequency, high-impact event that no one sees coming. And it could be that the Fed will be forced to jack up interest rates at a speed not seen since the 1980s. Even the perception of such actions could spook bond markets.
Read the full article on OZY here, and watch for the next in the series, out tomorrow.
