Central banks week

Negotiations between Iran and the U.S. continue. Hormuz is closed (or open depending on who you ask) and oil is being bid again. But this week is Monetary policy week: officials from the Fed, ECB, BoJ, Brazil, Colombia among others will meet on their respective committees to decide what is the adecuate level of interest rates, and the appropriate size of their balance sheets. You can see that in the top chart below. Now take a look at the bottom one: with very few exceptions, inflation is going up everywhere, in part due to the Iranian conflict, and the spike in oil prices. Even though inflation is not the only input for central banks, it’s an important one. No central banker will feel comfortable lowering interest rates with rising prices. Perhaps Kevin Warsh will surprise us, but it will have to come with other countermeasures that may be worse than a rate cut. This week may signal the start of a tightening cycle, or perhaps the change in direction from dovish to hawkish. And if it’s not, how would the bond market react?

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