The Era of Easy Money May Be Over Again

The pendulum appears to be swinging back towards tighter monetary policy across the world's major central banks.

It would seem that the global easing cycle has finally run its course. Among the 52 central banks tracked worldwide, May produced an almost perfect balance: 26 institutions raised interest rates, whilst an equal number opted to cut them. That may sound unremarkable, but it marks the first such equilibrium since early 2021. In the years that followed, the world entered one of the most aggressive tightening cycles in modern history.

That cycle reached its zenith in mid-2022, when the number of central banks raising rates exceeded those cutting them by 28. The recent shift suggests that the pendulum may once again be moving in favor of tighter policy.

The signs are already becoming evident. Last week, the European Central Bank raised rates by 25 basis points to 2.25%, its first increase since September 2023. Meanwhile, the Bank of Japan lifted rates to 1.0%, the highest level since 1995. Taken together, these moves point towards the possible beginning of a new phase of global monetary tightening.

The difficulty, however, lies in the timing.

Unlike previous cycles, developed economies are now burdened by debt levels that would have seemed extraordinary a generation ago. Governments, households and corporations have become accustomed to years of cheap money. Tightening policy in such an environment is a rather perilous exercise. Raise rates too aggressively and economies risk sliding into recession. Financial markets, built upon years of abundant liquidity, could prove equally vulnerable.

Perhaps the most intriguing aspect is geopolitical rather than monetary. Should this tightening cycle ultimately destabilize the existing economic order, the current hegemon may find its dominance increasingly difficult to sustain. Yet the world may discover that replacing a hegemon is rather easier said than done.

China, often viewed as the natural successor, is hardly insulated from the same pressures. A synchronized global slowdown would not spare Beijing any more than it would Washington.

Which leaves an uncomfortable possibility.

The next decade may not be defined by the rise of a new leader, but by the absence of one.

And history suggests that periods without a clear center of gravity are rarely the most tranquil.

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