“It was not the first, and it will not be the last,” said Claudio Borio, head of the monetary and economic department at the Bank of International Settlements. “It was just another bump along the narrow path of monetary policy normalization.” He’s referring to interest rates returning to normal, as is now underway in Europe and continued in the US today (Dec. 19) with another rate hike from the Federal Reserve.
Among the other causes for concern for investors: the inverting yield curve (which many take to be an indicator of an imminent recession), Brexit, the weakness of European banks, and the ongoing trade war between the US and China. Borio also noted that a lot of low-quality corporate debt “hovers like a dark cloud over investors,” which Quartz warned about this week in relation to the revelation that 90% of the debt issued by private-equity firms are the worst possible junk bonds.
“Faced with unprecedented initial conditions—extraordinarily low interest rates, bloated central-bank balance sheets and high global indebtedness, both private and public—monetary policy normalization was bound to be challenging especially in light of trade tensions and political uncertainty,” Borio added. “The recent bump is likely to be just one in a series.”
After a year that saw a massive increase in risk and uncertainty, putting fears that the longest bull market in US history is coming to an end, investors might be wary to hear that 2019 is looking even worse. But Borio’s remarks did have one silver lining.
Research conducted by Borio, Mathias Drehmann, and Dora Xia comparing recessions and financial cycles suggests that, at least since the early 1980s, economic downturns have typically been preceded by financial booms rather than higher interest rates. This suggests that we shouldn’t fear that inverted yield curve.