In February 1994, then-Federal Reserve Chairman Alan Greenspan launched a surprise interest rate hike. After falling from 8.25% in 1990 to 3.0% in 1992 and remaining frozen thereafter, the benchmark rate was raised six times that year by Greenspan, pushing it up to 5.5%. When the yield on 10-year U.S. Treasuries surged to 7.8% by year-end, U.S. investment capital that had flooded into Latin American countries rushed out. Stock prices in Mexico and Argentina were cut in half within a year, and Mexico eventually had to accept a bailout from the International Monetary Fund (IMF). Asia was no exception. Korea was forced to seek an IMF bailout in 1997.
The dark history of rate tantrums repeated itself under Fed Chairman Ben Bernanke. In May 2013, Bernanke triggered a global "taper tantrum" in financial markets with remarks suggesting the withdrawal of market liquidity to overcome the aftermath of the financial crisis. Major emerging economies such as Turkey and Brazil, from which foreign capital flowed out like an ebbing tide, were pushed into financial crisis.
Japan also suffered the pain of economic recession every time it raised rates. After the Bank of Japan raised its policy rate by 0.25% in 2000, the economy was severely shaken the following year by the impact of the dot-com bubble's collapse. When it raised rates twice after halting its quantitative easing policy in 2006, the country sank into entrenched deflation.
With signs that the Iran war is dragging on, government bond yields in major economies including the United States, Japan and the United Kingdom are showing signs of a tantrum. The yield on 30-year U.S. Treasuries recently hit 5.12%, the highest level in 19 years since July 2007. It has crossed the "deadly 5%" barrier, known as the "doorway to financial market doom." The yield on 30-year U.K. government bonds also jumped to 5.8%, reaching a 28-year high. Central banks, standing at the center of this dark history of rate tantrums, have served as the last line of defense in navigating difficult economic conditions. They must pursue exquisite yet prudent policies that curb inflation while simultaneously reviving the economy. The shoulders of central banks around the world, now receiving warning signals of rate tantrums, are heavier than ever.
