The markets have lost their bearings

THE Move index, which measures the volatility of the US Treasuries markets, has reached its highest level since 2008. Having entered a phase of structural transition after years of anaesthesia due to the interventionist policies of central banks, the markets seem to have lost their bearings.

In fact, the period of administered rate markets has come to an end. Faced with a succession of crises starting in 2008, ultra-accommodating monetary policies combined with expansionary fiscal policies ensured a quasi-monetisation of public debt. Central banks, through clear forward guidance, gave investors visibility on their asset purchase programmes and on their intention to keep interest rates at very low levels for a very long time. Inflation expectations were firmly anchored.

In recent months, central banks have been tightening monetary policy at an accelerated pace. The persistence of inflation has led them to make a sharp turn, all the more violent as they have failed to characterise the price increases of the last two years. Central bankers are now focusing on their main mandate, inflation, and are pulling out all the stops: successive sharp rate hikes and end of asset purchases. Their message is clear: if necessary, they will go beyond the simple normalisation of their monetary policy, which would involve setting rates at a neutral level, assuming a recessionary impact on activity.