UNITED STATES: Following the U.S. Federal Reserve in the fight against inflation causing shockwaves across financial markets and the economy, international central banks kept hiking interest rates on Thursday.
Japan, the outlier among the major developed economies, held interest rates unchanged on Thursday, only to suffer the consequences as traders drove the yen’s value against the dollar to historic lows, forcing the government of Japan to intervene for the first time since 1998 to strengthen the yen.
It was a possible precursor to a significant adjustment that will occur as the world adjusts to U.S. interest rates increasing to levels not seen since the global financial crisis forced the Fed to cut its policy rate to zero and start buying bonds in record amounts 15 years ago.
That period of affordable liquidity, which lasted through the worst of the coronavirus pandemic and until inflation emerged as a significant issue, is now coming to an end.
Federal Reserve officials have now signalled not just plans to continue tightening monetary policy but to keep it tight for years to come, which may amount to a fresh financial shock for many countries. U.S. interest rates and the U.S. dollar are benchmarks for borrowing costs worldwide.
Although it increases the cost of many dollar-priced imports for other nations, the rising dollar value helps to reduce inflation in the United States, which may have contributed to Japan’s intervention.
When questioned about the yen’s significant decline in July, U.S. Treasury Secretary Janet Yellen responded that currency intervention was only justified in “rare and extreme circumstances.”
Even though many countries are struggling with a severe epidemic of inflation in the wake of the COVID-19 pandemic, the Fed’s approach has stood out because of the dollar’s worldwide significance and the aggression of the U.S. central bank.