With a rather good sense of timing, the IMF warned last week in its biannual global financial stability update that risks to the financial system have risen this year.
It is concerned that the easy financial conditions in place for much of this decade are contributing to a build-up of vulnerabilities, such as high debt levels and stretched asset valuations.
The IMF warned markets appear complacent about the risk of a sharp tightening in financial conditions. It says monetary policy could be a trigger for such an event.
We have already seen this year how the steady tightening of monetary policy by the Fed and associated strengthening of the dollar have impacted emerging economies and their financial markets, in particular those with elevated levels of foreign currency debt and weak public finances.
This has put severe downward pressure on the currencies of a number of emerging economies, forcing their central banks to raise interest rates to extremely high levels.
The impact of the tightening of US monetary policy has been felt closer to home in the past few weeks.
The US treasury bond market finally crumbled in the past fortnight as markets continue to revise upwards their expected path for US interest rates in the face of the steady tightening of US monetary policy by the Federal Reserve.
Ten-year treasury yields hit their highest level since 2011. Yields on the two-to-five year part of the US curve have reached 10-year highs.
The selloff in bond markets has spilled over into stock markets in the past few days. US equity markets are at elevated levels underpinned by a strong economy and what had, up to recently, been very low interest rates.
Rising US interest rates are now pressuring stock markets, much to the annoyance of President Donald Trump.
The near-term outlook for the economy looks very positive. Hence, there could be more pain in store for markets from rising US interest rates.
The Federal Reserve has warned that we are “a long way” from neutral rates and that the Fed “might move a little quicker” than expected in raising them.
Oliver Mangan is chief economist at AIB
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