What Would Paul Revere Tell Equity and Credit Market Investors if He Were Alive Today?

If Paul Revere were alive today, instead of yelling, “The British Coming,” he would be screaming the words, "Short-term interest hikes are coming!”

Henry Wadsworth highlighted this story in his Longfellow 1861 poem by recounting Paul Revere's famous journey on April 18, 1775. We know this story was built on loosely compiled facts since Paul Revere never arrived at his intended destination of Concord, Massachusetts. Revere was arrested by the British patrol before reaching his final destination. But, we all still give Paul Revere full credit for his “efforts and intent.”

The good news is that if Paul Revere were alive today, he would not be detained for telling us that central banks will soon be raising short-term rates, as over a dozen Central Banks have already moved to shore up short-term rates.

Russia's Central Bank has already raised short-term rates seven times. Other Central Banks, located in the United Kingdom, Mexico, Chile, Costa Rica, Pakistan Hungary, and Armenia to name a few, have already begun this journey.

Interestingly, before the Fed began thinking about thinking of raising short-term rates, they assured us that major hurdles needed to be in place before they would start the process of tapering their asset purchases of Treasury and Mortgage-Backed securities. Then other factors would have to be satisfied before raising short-term rates.

That has long ceased to be the case today as Fed officials accelerated the tapering process to end in March 2022 instead of later in the year and are strongly hinting that they are doing this to permit them to begin raising short-term rates sooner. To the average person/investor listening closely to Fed officials, it is like they are rushing to stop their asset purchases so that they can begin raising short-term rates quicker and more aggressively in 2022.

And it is not just the Federal Reserve that has jumped on this policy train that has already left the station. The European Central Bank (ECB) recently (released quotes) from two Governing Council Members, namely, Robert Holtzmann, and Klaas Knot stating that as soon as they complete the tapering process, the ECB will be poised to raise rates. In the case of the ECB, their first target will be their policy deposit rate (i.e., the rate the ECB compensates member banks for deposit balances). That rate has been -10 basis points since 2014. Raising that rate by at least 10-basis points will signal to the market that the journey towards higher short-term rates has begun.

For 2022, consumers and investors in the U.S. and many parts of the world need to be prepared to see interest rates on auto loans, home mortgages, and personal loans moving higher. That trend should broaden out further in 2023 as the ECB joins this parade of Central Bank actions. At first, this trend will slow the most interest-sensitive sectors such as housing and auto purchases a bit. But eventually, this trend will bleed into other sectors of the economy as liquidity dries up.

The intent is not to kill their economies but rather to dampen growth enough to arrest the flames of rising global inflationary pressures. Although the jury is still out on whether central banks around the world will succeed in this endeavor, we give these central banks full credit (as we do in the case of Paul Revere) for their “efforts and intent.”

Let us all hope that financial markets do not arrest Central Banks before they moderate economic growth sufficiently to achieve their goal of dampening global inflationary pressures.

It would be a shame if Paul Revere were not permitted to complete his ride!