The whole world is adapting to the new era, where money is not cheap
Investors appear convinced that major Western central banks are close to a long-awaited turnaround, moving in the zone from raising interest rates to cutting them. As a result, markets rallied last year, but 2024 could hold surprises. The whole world is adjusting to the new economic order, where money is not cheap. Shares in global conglomerates sparked brisk buying, while high government bond yields retreated in recent weeks, despite central bank governors trying to hedge bets on immediate cuts to borrowing costs.
For example, in the United States investors are now clearly positioned on the future policy of the Federal Reserve Bank (Fed), leading the economy to a soft landing and helping to de-escalate inflation without triggering a recession. Market sentiment was shaped after the US economy surprised everyone with its strength. This is partly due to consumers saving money due to the pandemic and America looking attractive as a safe haven for investment in an increasingly chaotic world.
A well-known economist and former Fed official claimed months ago that the Federal Reserve has been called upon to manage soft landings more often than most people think. However, not a few investors and Fed officials believe the likelihood is slim as pandemic-era savings are depleted and clouds are gathering, especially with the upcoming and contentious US election. Investors are betting that the Fed could cut rates by as much as 1.5% by the end of 2024, but that would still leave key rates near 4%, higher than they have been for most of the past 20 years .
At these levels, then, monetary policy will again be a brake on growth, because the cost of money will be above the so-called neutral rate, at which the economy neither expands nor contracts. Add to that a host of other risks that threaten the 2024 outlook: two major wars, heightened geopolitical tensions that have sent globalization steadily into reverse, and elections in many countries that could fundamentally change the world order in unexpected ways. .
Interest rates underpin everything from economic growth to the price of financial assets and how much it costs to borrow money to buy a car or a house. Higher interest rates make riskier assets such as tech stocks and cryptocurrencies less attractive because investors can earn a decent return without having to take on a lot of risk.
If and the Fed and other banks have been raising interest rates for well over a year, the world has not yet completed the transition to the era of expensive money, and this year its effects will be more apparent. This means that companies and entire countries will restructure their liabilities against their difficulty in paying interest. US corporate bankruptcies hit a record high in 2023 compared to 2020. Many more are likely to follow, while for consumers saving would bring them more, but higher borrowing costs will require them to adjust.