The central bankers have changed their strategy after being forced to catch up with tackling inflation recently. Once again, Australia was at the forefront of the change. A month ago, the Reserve Bank represented by Phillip Lowe sparked a rally in global stock markets by slowing the pace of interest rate increases from 0.5 percentage points to 0.25 percentage points, making him the first major central bank to do so. They were anxious for any sign of a pause in the punishing series of rate hikes, and Australia delivered.

A few weeks later, the US Federal Reserve, the world’s most powerful central bank, secretly revealed that it, too, was thinking of doing the same, possibly early in the New Year. The Bank of Canada then jumped on board, slashing its rate hikes in half. After a year of instability, the combination was enough to throw financial markets into a frenzy. Stocks, bonds, and currencies all calmed briefly and even lurched into gear. A few commentators picked up on the pattern, thinking at how closely global central banks had become. Not only were they all raising rates at the same time, but they also appeared to be using the same strategies.

They each went public with warnings of dreadful times ahead and much higher interest rates. It’s a well-known fact that the threat of doing something, in this case, the rise of interest rates, makes everything risky. If everyone believes that super high rates will return, they would respond appropriately, cutting back on expenditure, just as they would if rates increase. This may help break even or suffice the scenario. The rush to increase interest rates has been one of the quickest on record. And the longer it goes on, it leads the entire world into a deep recession.

A rate hike first affects money markets, stock markets, and currency markets before affecting consumer interest rates. This reduces consumer spending, resulting in a decline in sales. Businesses then respond by reducing investment and hiring fewer people, resulting in an increase in unemployment. Consider that we’ve experienced the equivalent of 11 rate increases in just 7 months. 

The “wealth effect” of rising real estate values is being mentioned, suggesting that customers with an increase in home values will spend more, keeping the economy booming. The same holds true for stock markets. For the past 30 years, central banks have rescued whenever equities have fallen, lowering interest rates and injecting trillions of dollars into the global economy to ensure investors are spared from any losses.

For the time being, the US Federal Reserve, the RBA, and every other developed country have let homeowners and stock markets go as they manage consumer price inflation.

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