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It is a brave policymaker who takes a relaxed view about low inflation when deciding to raise rates. So investors should acknowledge the courage of Bank of Canada, governor Stephen Poloz. He announced, this week, his country's first rate rise in nearly seven years, even though inflation is nowhere near his 2% target. And he delivered an upbeat view on the economy and on hitting that target.
Contrast his very ballsy approach with Federal Reserve chair Janet Yellen. Now, she too, had taken a relaxed view about low inflation at last month's Federal Reserve meeting. Yet, at the very moment Mr. Poloz was raising rates, she was telling the US Congress, the Fed would, after all, be watching inflation "very carefully". And that, while some of the reasons for inflation weakness were indeed temporary, there could be more going on there. Sounds a bit wobbly.
The market being what it is, investors reacted two ways. Mr. Poloz triggered big leaps in the Canadian dollar and the two-year yield. Ms. Yellen drove falls in the US dollar and treasury yields. So what does this tell investors?
First, the G10's retreat from quantitative easing is no longer a topic for discussion. It is happening. Second, the debate about inflation targeting is going to intensify. Imagine if we had hit 2% inflation when the unemployment rate was 6%, wonders Steve Englander at the Hong Kong fund Rafiki Capital. Would we or the Fed be high-fiving because we hit our targets?
Third, the retreat will be full of stop-starts and contradictions. Swedish inflation on Wednesday beat expectations sending the krona higher, but the Riksbank worries it could hike too soon, and it prefers to see inflation overshoot. Fourth, policymakers may agree about the general needs to move away from monetary easing, but are a long way from coordinating. Finally, volatility is going up. Investors recognise that the QE retreat is the big issue for financial markets, and they are starting to get nervous about it.
