After heaving a sigh of relief for the end of interest-rate hikes, chief executives and investors should be taking a deep breath. Even if the U.S. Federal Reserve starts reversing its policy later this year as expected and makes money available a little more cheaply, corporate borrowing expenses will nevertheless keep rising. To cover them, companies could be forced to seek cutbacks elsewhere. Stock buybacks, new projects and cash-funded takeovers look especially vulnerable. The most immediate and dire consequences of 11 rapid-fire increases in the benchmark U.S. federal funds rate have mostly flowed through the financial system. A series of

Wednesday’s sharp drop in the S&P 500 Index left the U.S. equity benchmark within a hair’s breadth of a bear market. Over the last century in the United States these episodes – defined as a stock market decline of at least 20% – have been relatively brief, lasting on average less than 10 months. In recent decades, they have also become less frequent. That’s largely because the Federal Reserve has always been on hand to bail out Wall Street. But the return of inflation changes everything. With the so-called “Fed put” off the table, the next bear market could last

European Central Bank President Christine Lagarde has sprung a surprise worthy of her UK counterpart, Andrew Bailey. The Frenchwoman left interest rates unchanged on Thursday whereas the Briton raised them. Yet she was the one that made the bigger splash with a change of tune on inflation prospects that suggested the ECB might join its global peers this year in raising interest rates. Lagarde dropped the central bank equivalent of a bombshell by saying that euro zone inflation, which hit a record high of 5.1% in January, was likely to stay elevated for longer than previously anticipated and that risks were now tilted

Big Oil is playing the unusual role of kingmaker at the U.S. Federal Reserve. The energy sector has come out swinging against Sarah Bloom Raskin, President Joe Biden’s pick to lead supervision at the U.S. central bank – and its objections found full voice at a Senate hearing on Thursday. Raskin is qualified to be vice chair for supervision. She served as the No. 2 in the Treasury during the Barack Obama administration, and worked with the financial industry to shore up firms’ cyber defenses amid a spate of hacks. Earlier, as a governor at the Federal Reserve, Raskin focused on

Consumer prices are picking up in developed and emerging economies alike. But central bankers in the latter don’t have the luxury of waiting, like U.S. Federal Reserve Chair Jerome Powell, to see if this is a temporary phenomenon. Instead, they will have to traverse the various stages of inflation grief. The International Monetary Fund expects inflation will accelerate to 2.4% in 2021 from 0.7% in 2020 in developed countries, and to 5.4% from 5.1% in emerging and developing ones. Rising food and energy prices, pandemic-related supply-chain disruptions and surging shipping costs are among the driving forces. In rich countries, inflation

The Bank of England’s August Monetary Policy Report included an update of their macroeconomic projections out to 2024. The Bank now expects UK inflation to peak at 4% towards the end of this year and start of 2022, before drifting back towards target by the end of the forecast horizon. While many, including Fathom, agree with the Monetary Policy Committee’s assessment of the near-term outlook, there is less consensus beyond the end of this year. Key in the medium term will be how quickly excess pandemic-induced savings are spent and the extent to which higher short-run prices get embedded into

The death in December of Paul Volcker, former chairman of the U.S. Federal Reserve and famed inflation-fighter, is a reminder that galloping price increases used to be a problem. In recent years, though, inflation has largely gone missing. Its return in 2020 would be an unexpected bright spot. Not, of course, the kind of inflation Volcker countered with tough monetary policy in the early 1980s, when annual price increases topped 10% in America. Or the debilitating 50% annual rate in Argentina as of October. But there’s a lot to be said for modest price gains. The failure of U.S. price

The press release that followed the ECB’s latest monetary policy meeting echoed recent comments by Mario Draghi, and more or less confirmed that the central bank has now adopted an easing bias. Fathom now expects the ECB to ease policy through some combination of asset purchases and the introduction of a system of tiered deposit rates. The growing likelihood of further loosening has been reflected in bond markets, with the yield on ten-year Bunds falling roughly 90 basis points over the past twelve months. The prospect of yields remaining lower for longer has been interpreted as good news for the

Next week the US Federal Reserve will hold a research conference in Chicago as part of its review into the objectives and the operation of monetary policy. Further meetings will be held with stakeholders over the coming months, with findings due to be communicated to the public in the first half of next year. In recent years the widespread practice of targeting low rates of inflation has been found wanting. Our chart shows a long moving average of inflation in six inflation-targeting economies: the US, the euro area, the UK, Japan, Canada and New Zealand. Central Banks in each of

The latest Federal Reserve credit tightening leaves Jerome Powell exposed in multiple ways. The U.S. central bank raised rates on Wednesday despite criticism from President Donald Trump. Slowing growth and bearish markets will only complicate its task going forward. Trump has been hammering his hand-picked chairman for months to hold back on rate hikes, telling him on Tuesday to “feel the market.” On Wednesday, the Fed hiked rates by a quarter point to a range of between 2.25 percent and 2.5 percent. It’s the ninth such increase since it began raising rates in 2015. The Fed’s path in 2019 is

Last Friday, at our Monetary Policy Forum (MPF) event hosted in partnership with Refinitiv, we called for the advanced economies to shift decisively to a higher yield environment. Ten years before, in the throes of the most severe global financial crisis for 80 years, Fathom used our first MPF to argue strongly in favour of unconventional monetary policy, such as quantitative easing (QE). A decade on, in the final quarterly MPF, we called for these policies to be reversed in order to escape the low growth, low interest rate environment that the advanced economies remain stuck in. We were joined

Fathom’s Sovereign Fragility Index (SFI) aims to provide an objective measure of the underlying risk attached to government debt. Therefore, a comparison of the SFI-implied and observed spreads is one way to observe the effects of unconventional monetary policy and swings in market sentiment. At present, government bond yields remain significantly below the levels implied by the SFI across most of the euro area periphery with financing conditions relatively benign. Italy, however, remains an exception to this with ten-year yields remaining above the 2.5% predicted by the SFI, amid the political uncertainty generated by the government’s confrontation with the EU.