Macroscope | Two lessons for the global economy, from the Fed’s 2007 missteps
- The US central bank is expected to maintain higher interest rates for longer, not unlike in the months leading up to the global financial crisis
- The trouble is that monetary policy eventually works and central banks can’t really control how that plays out
The earlier period of rate stability lasted 15 months and the expectation today is for the rate peak to last around 10 months. This plateau is being referred to in some quarters as a “Table Mountain”, after South Africa’s famous flat-topped peak.
Globally, things have become a little different since 2006-2007. China was in full growth mode at that time, with economic expansion of between 12 and 14 per cent. But the dollar was strong, like it is now.
So how did markets perform during that earlier period of “higher for longer” interest rates?
The good news is that everything delivered positive returns, though there was much dispersion. The Japanese equity market was the worst-performing stock index, managing only a 4.5 per cent change in 2006-2007, while emerging markets posted huge returns. China’s equity markets gained 200 per cent in the same time span.
This, in turn, had a positive impact on returns in markets like Mexico, Brazil, Hong Kong, South Korea and Japan. Germany was the best-performing Western equity market – even though European interest rates were rising – reflecting the impact of Chinese demand on German-manufactured goods such as cars.
