The Economist, June 14, 2018

ON JUNE 13th the Federal Reserve raised its benchmark interest rate by a quarter of a percentage point, the seventh such increase since it began shouldering rates away from zero in December 2015. Markets shrugged—a rather different reaction from the one that followed a policy adjustment made five years ago this month. The chairman then, Ben Bernanke, dared advise investors that the Fed might soon start winding down its stimulative bond-purchases. Traders fell to their fainting couches, but not before pausing to sell. Yields on ten-year Treasury bonds leapt. Currencies around the world flopped. This “taper tantrum”, as it became known, raised concerns that Fed tightening might so perturb global markets that America itself could suffer. Having survived both tapering and rate increases, Fed officials now seem inclined to dismiss such worries. They should not. The danger of a nasty Fed feedback loop remains.

Wise central bankers are prepared for ill winds blowing from abroad. Thanks to global financial integration, these have strengthened in recent decades. The ratio of assets held across borders to world GDP has roughly tripled since 1995. In the same period market movements have become more closely aligned internationally. According to a new working paper by Òscar Jordà, Moritz Schularick, Alan Taylor and Felix Ward, this co-movement has reached levels unseen for at least 130 years—surpassing the highs of the early 20th century. Correlations are particularly high across equity markets (see chart), a trend the authors believe is driven by shared fluctuations in the appetite for risk. So, as even the most casual observers can see, bad days for Asian shares are usually accompanied by ugly ones in Europe and America. “[…]”

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