CHOPPY WATERS

In its quest to keep interest rates afloat, the Federal Reserve is sailing into the wind

The Federal Reserve wants it to be one way, but investors and other major central banks are pointing to something else.

As the engines of the global economy keep showing signs of slowing, there’s growing doubt that America’s central bank will be able to stay on its path toward normal interest rates.

The biggest hint yet is that the yield on the Japanese 10-year bond is creeping ever closer to zero, in an eerie repeat of the fear-driven flight to German bonds a few months ago.

Granted, the Bank of Japan is a huge player in the Japanese bond market, and it’s encouraging the rally with negative benchmark interest rates in an attempt to breathe life into its own moribund economy. But seeing negative yields that far out on the yield curve always grabs attention—even from rather unexpected places.

Another ominous sign is that the Bank of England decided this morning (Feb. 4) to hug the zero lower bound a little tighter; the BoE’s governors made the decision unanimously, the first time they’ve done so since July.

Not too long ago, the BoE and the Fed appeared to be in a similar situation: falling unemployment and decent growth amid low inflation. But after the Fed hiked interest rates in December, their paths diverged.

Meanwhile, over at the European Central Bank, bank chief Mario Draghi is still sounding worried about low inflation, even with all the bond purchases the ECB has made to help juice the euro zone’s so-so economic recovery.

From mid-2014 until now, the US dollar has been rising on the back of faith in American exceptionalism—that the Fed could keep raising rates and “normalize” US monetary policy even in the face of headwinds elsewhere, making the greenback look like even more of a safe haven than usual.

But in the last week things have taken a turn for the worse. Weak economic data on the service sector has people fearing—rightly or wrongly—that a recession or some other such gloom is in store.

Bad news rolls downhill, and all these signs are now weighing on investors, many of whom are now doubtful that the Fed will raise rates at all this year. That’s a huge reversal from what the market was indicating last year, and a sure sign that Fed chair Janet Yellen’s work is cut out for her.

home our picks popular latest obsessions search