The US misfires as the world economy takes a bullet
The looming global recession has been described as a ‘once in 100 years catastrophic event’
If you are going to fire a shock-and-awe bazooka for psychological impact, you must be sure of hitting your mark. The US Federal Reserve has just failed to do this in a spectacular fashion.
The first emergency rate cut since the Lehman crisis has precipitated a further slide in 10-year US treasury yields to historic lows under 1%, taking the whole sovereign universe into uncharted waters.
Bond markets are pricing in a global deflationary bust. Real yields out to 30 years have crashed deeper into negative territory. The Wicksellian natural rate of interest has been falling faster than the Fed can keep up, and in doing so it is automatically tightening financial conditions. We are now in an even more dangerous world. The Fed is closer to policy exhaustion without having achieved anything. It has two or three cuts left before it hits the floor...