Ben Bernanke, the most powerful banker in the world, hinted at it last month, and this past week the world’s second-most powerful banker, JPMorgan CEO Jamie Dimon, said it outright: Interest rates are going up.
Of course, they have already gone up — significantly so, in relative terms, from a low of 1.4 percent on a 10-year Treasury last fall to a high of 2.29 percent earlier last week.
That’s why the Federal Reserve meeting this week will be the most important of the past few years.
It may also be Bernanke’s last (or second-to-last) conclave before President Obama announces his successor.
While casual observers of the daily close of the Dow Jones industrial average may have not noticed the mayhem in the markets since Fed chief Bernanke hinted on May 22 that he might throw some ice into his punch bowl of liquidity, trouble is percolating all over the globe.
In Europe, stocks fell for the fourth straight week to their worst levels in a year, Japan’s Nikkei index has dropped into bear market territory, and US mortgage rates have risen back above the 4 percent level.
All told, more than $3 trillion in stock-market wealth worldwide has been wiped out.
If Bernanke’s hawkish comments in late May were a trial balloon to see what a tapering of the Fed’s easy-money policies would look like, the Fed now has its answer: Not good. Not good at all.
The biggest bond buyer in the world, Bill Gross, the founder of Pimco, is also very worried about Bernanke’s predicament.
In a special dispatch to his investors Friday, Gross warned that “central banks have reached a critical inflection point in which the negatives of their aggressive policies may be outweighing the positives and in fact hampering growth.”
Interest-rate inflection points come far less frequently than inflection points in the stock market, but when they do come (as they did in 1987 and 1994), the ripple effects are felt far and wide.
It’s something Bernanke is surely pondering this weekend, with the Dow up 15 percent on the year and six months still left on the job — six months in which a lot of bad things could happen.
It’s any central banker’s worst nightmare.