![]() The big risk for investors is if the latest rally in asset prices, combined with persistently high inflation, persuades central bankers that further monetary tightening is required.īond markets are alert to this risk, with futures markets now pricing in a 65 per cent probability that the Fed will raise rates by 25 basis points at its June meeting, up from just 18 per cent a week ago.Jordan Ross Belfort ( / ˈ b ɛ l f ə r t/ born July 9, 1962) is an American entrepreneur, speaker, author, former stockbroker, and financial criminal. What’s more, it’s clear that both the Reserve Bank and the Fed are uncomfortably aware that although higher interest rates have caused price pressures to abate somewhat, inflation remains well above target. Similarly, since early 2022 the Fed has lifted its target interest rate from near zero to a new range of 5 per cent to 5.25 per cent, while the Reserve Bank’s cash rate has climbed to 3.85 per cent. The US Federal Reserve hiked its key interest rate target from 4.75 per cent in mid-1999 to 6.5 per cent almost a year later. ![]() Then, as now, risky asset prices were rising sharply even as central banks were raising interest rates. There are, however, eerie parallels between the latest rally in US tech stocks, crypto and the Australian housing market, and the final stages of the dotcom bubble in 1999. The close linkage between rising house prices and consumer spending is evident in the minutes of the Reserve Bank’s board meeting in May, which noted that the “significant decline” in house prices over the past year had helped curb consumer spending.īut, the minutes noted, “housing prices had recently stabilised and some increases had been recorded”, and this prompted the RBA to nudge its forecasts for future consumption growth slightly higher. Higher interest rates only work to curb inflation because they inflict enough pain that people – both consumers and businesses – are forced to change their spending and investing behaviour. And this complacency, of course, is reinforced by the wealth effect from rising asset prices.īut this attitude undermines the whole point of monetary tightening. ![]() That’s because if people are convinced that high interest rates are only a temporary inconvenience, they won’t feel any need to cut back on their spending. The problem is that the rebound in asset prices suggests that central banks could well be forced to tighten monetary policy even further to force people to change their attitudes, and their behaviour. In turn, this decision to invest their surplus savings suggests that investors believe that rampant inflation will turn out to be a temporary problem, and that central banks will be able to rein in steep price rises without causing economic activity to slow too sharply.Īs a result, risk markets now exhibit a sunny optimism that interest rates will only remain elevated for a relatively short period of time, before they come back down again. Although nationwide the median single-family existing home sale price fell 0.2 per cent in the first quarter from a year earlier, house prices are still rising in many parts of the Midwest, South and Northeast while dropping in Western states.Īll the same, the widespread rebound in asset prices suggests that investors have become emboldened by the resilient economic backdrop and continuing low rates of unemployment to invest part of the large pile of savings they accumulated during the pandemic for investment. Meanwhile, the Australian housing market is shrugging off the effect of a steep rise in mortgage rates, leading some experts to predict that Sydney house prices could rise by 10 per cent or more this year, if the market continues its present pace of growth. This has helped lift the total market value of digital currencies to $US1.1 trillion ($1.7 trillion), a remarkable achievement given the high-profile bankruptcy of the cryptocurrency exchange FTX last November, and the growing regulatory scrutiny the industry faces. ![]() At the same time, the crypto industry has managed to stage a staggering recovery, led by a close to 70 per cent jump in the price of Bitcoin this year. ![]()
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