The bond and derivatives markets appear to be taking the lead in tightening financial conditions, potentially easing the burden on central bankers. Swaps are indicating a global wave of interest rate hikes over the next year, while long-term bond yields have reached multi-decade highs in the US, Europe, and Japan.
This shift has led figures like Federal Reserve Chair Kevin Warsh and policymakers from the Bank of England and European Central Bank to suggest they might need to raise rates less aggressively. Their reasoning is that higher borrowing costs in the debt markets should naturally slow economic growth and inflation.
However, critics argue that relying on market-driven rate increases is a flawed strategy. They warn that central banks risk damaging their credibility if they use rising bond yields as an excuse to avoid decisive action. Market rates alone are seen as an inadequate replacement for a well-defined monetary policy.