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It’s not a financial crash. But the signs of turmoil piling up in all segments of the financial markets (equities, bonds, currencies, cryptocurrencies) are increasingly resembling those that preceded the bursting of the internet bubble in 2000.
On June 16, the Dow Jones, one of Wall Street’s leading indices, fell back below the symbolic 30,000 point mark. Since the beginning of the year, it has lost 17% in value, just like the Dax, the Frankfurt Stock Exchange Index or the CAC 40 at the beginning of the year, while the world of cryptocurrencies looks like a veteran: Bitcoin, the most famous among them, is below $20,000. On January 1st it was $41,790 (read the article by Romaric Godin).
Although the decline in financial markets began a few weeks ago, the US Federal Reserve’s June 15 decision to raise interest rates by 0.75% undoubtedly felt like a cold shower. Although the Fed had already started tightening monetary policy and raising interest rates, nobody expected such a sharp rise. A surge that looks like panic to some.
You have to go back to 1994 to find interest rates rising that sharply. In general, the US Federal Reserve is sticking to the policy of taking small steps: 0.25% here, 0.50% there. But with inflation hitting 8.6% in May, it seems the time is no longer for the Fed to take cautious steps.
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Criticized for months of underestimating the magnitude of the inflationary tensions linked to the Covid exit, which were then exacerbated by the war-in-Ukraine energy crisis, which for months was portrayed as “temporary”, the Reserve Federal government obliged to accelerate monetary policy Recovery: It must curb this inflation at all costs, even if it is at the expense of growth and jobs. According to President Jerome Powell, its credibility is at stake. “The worst mistake we can make is to fail, which is not an option. We must restore price stability. It is the basis of our economy,” he stressed, commenting on the last meeting of central governors.
Apparently, the tightening of US monetary policy will not trigger the earthquake feared by the financial markets. Having interest rates of 1.75% in a context where inflation exceeds 8% means always operating in a negative interest rate environment, even if it is a little less negative than before. And that also applies to mortgage loans or consumer loans – unlike in France, these have variable interest rates and adjust immediately if the key interest rate changes: they have been raised to around 5.6%.
On Wall Street, the Dow Jones dropped more than 600 points on June 16th. © SPENCER PLATT/Getty Images via AFP