In an article published by the WSJ today, which was originally titled “Are Central Bankers About to Lose Control?” but after some shoulder taps was renamed to the far more neutral “Can Central Banks Keep Control of Interest Rates?” author Jon Sindreu looks at the current Goldilocks state of the market, in which global growth is “coordinated and widespread” yet inflation remains absent preventing central banks from hiking rates rapidly, resulting in “elated investors” who nonetheless are haunted by a question “will interest rates develop a mind of their own?”
The response to this question will also answer the overarching question posed by the WSJ: are central bankers about to lose control after nearly a decade of artificial vol suppression and asset inflation on the back of $15 trillion in excess liquidity. The goalseeked response that the WSJ is looking for, is also the result of a Blackrock report released last week titled “The real story behind low interest rates.”
For those who are too busy to bother with the semantic definitions of interest rates and their technical components, whether breakevens or term premia, ultimately the cost of money boils down to one thing: the inflation-adjusted opportunity cost of holding one asset relative to another. This is why the world’s central banks have been scrambling over each other to push rates as low as possible for the better part of the past decade to force investors into risky assets, or, as the WSJ puts it, “low inflation-indexed – or ‘real’ – rates push money into risky assets, because investors get little extra purchasing power for holding safer securities.” Here the WSJ references the BlackRock report which claims that “subdued real rates have been 2017’s main driver of returns in global infrastructure debt and investment-grade corporate debt. They also boost gold and real estate, analysts say, which don’t pay coupons but don’t lose value when inflation rises.”
This post was published at Zero Hedge on Dec 26, 2017.