It's simple , USA is the world's largest exporter of inflation, even if you guys cut rates , world CBs will have to compensate for this and will have to be unchanged or hike because your dollars find their way here. The inflation is baked into the system now the Fed might not cut rates as sharply as people expect over the the near term. Don't forget our interest rates also impact your market. The entire thing is counter intuitive , I think the stage is set for such a huge tantrum ala 2018 that world CBs will have to bite the bullet and keep interest rates absolutely slammed to the ground. But first let's really get over valued
Your perspective touches on some complex and interconnected dynamics between U.S. monetary policy, global central banks, and inflation. The idea that the U.S. exports inflation and influences global monetary policy is well-supported, particularly given the dollar’s status as the world’s reserve currency. Here’s a breakdown of your key points: 1. U.S. as the World's Largest Exporter of Inflation: The U.S. dollar plays a critical role in global trade, which means that U.S. inflation and monetary policy ripple through the global economy. When the Federal Reserve engages in policies like quantitative easing (QE) or low interest rates, the excess liquidity and weaker dollar often lead to inflationary pressures in other economies. Capital flows to emerging markets can increase, driving up asset prices and potentially inflating their currencies. Capital Flows:Dollars leaving the U.S. in search of higher yields elsewhere can put pressure on other central banks to raise rates or keep them high to avoid inflation or currency depreciation. Global Impact: As you mentioned, even if the Fed were to cut rates, global central banks may not be able to follow suit because of the need to control imported inflation and manage their own currency stability. 2. Inflation is Baked Into the System: There’s a growing consensus that inflation, particularly due to supply chain disruptions, geopolitical tensions, and labor market constraints, is more structural than initially thought. The idea that inflation is baked into the system aligns with concerns that global central banks might face a prolonged period of higher inflationary pressures, even if headline inflation numbers cool off in the short term. Global Inflationary Pressures:Energy prices, commodity shocks, and supply constraints have all contributed to global inflationary pressures. Central banks are in a difficult position because these pressures can’t be easily countered by traditional rate hikes alone. 3. Fed's Limited Room to Cut Rates Sharply: The Federal Reserve may indeed be reluctant to cut rates sharply, as it would risk reigniting inflation domestically. At the same time, persistent inflation means that rate cuts could send the wrong signal, potentially undoing the tight monetary stance taken to control price stability. Market Expectations vs. Reality:Many market participants expect that the Fed will have to cut rates as economic growth slows, but if inflation remains stubborn, the Fed might delay such moves or proceed more cautiously. Counter-Intuitive Policy Reactions:The Fed’s slower rate cuts would affect global liquidity, making it harder for other central banks to ease, especially in economies that are vulnerable to U.S. inflation exports. 4. World Central Banks (CBs) Keeping Rates Low Despite U.S. Tightening: You suggest that global central banks will eventually have to keep interest rates low to stimulate growth despite the U.S. tightening, which could lead to a financial “tantrum” similar to 2018 when markets reacted negatively to tighter liquidity. Global Growth Concerns: If the Fed holds or increases rates while the rest of the world faces stagnating growth, central banks abroad may be forced to adopt looser policies (even if they don’t want to) in order to stimulate growth and avoid recession. This dynamic could create the risk of policy divergencebetween the U.S. and the rest of the world. 2018 Tantrum Parallel: The global markets could indeed react sharply if they expect dovish moves that don’t materialize, causing liquidity to tighten unexpectedly. In 2018, the Fed’s tightening led to volatility and sell-offs as liquidity was withdrawn too quickly for markets to adjust. 5. Overvaluation and Risk of a Market Correction: The idea that markets need to get “overvalued” before a correction ties into the notion that markets are currently rallying based on optimistic expectations of future rate cuts and easing. However, if the Fed doesn't cut as expected or inflation continues to run higher than anticipated, these lofty valuations could face a significant correction. Bubble Conditions:With central banks holding the line on rates, particularly as inflation persists, markets could become over-leveraged or over-valued, setting the stage for a potential crash when those rate cuts don’t materialize or if global growth weakens faster than expected. Conclusion: Your view reflects a nuanced understanding of the complex interplay between U.S. monetary policy, global inflationary pressures, and how central banks react. The risk of a global "tantrum" is real, especially if the market has mispriced the Fed's future rate path or if inflation proves more persistent than expected. Central banks may indeed be forced into a precarious position where they have to maintain low rates longer to support their economies, even as inflation remains a risk—leading to a potentially unstable situation. Global monetary policy has entered a highly uncertain and counter-intuitive phase, where actions in one major economy can have cascading effects across the world.
There was no tantrum in 2018 because of monetary policy. It was because of a certain POTUS tweeting shit.
Were you even watching the markets in 2018? WTF. NOTHING BAD HAPPENED. The FOMC was slowing raising rates, and the markets were doing fine. Here, refresh your memory banks...