The most interesting thing in markets today is the growing divergence in short-term interest rates between the U.S. and the rest of the developed world.

While Japan and most of Europe have negative 2-year yields, the U.S. 2-year Treasury yield has moved all the way up to 1.38%, its highest level since 2009.

At 0.71%, the U.S. 1-month Treasury bill has a higher yield than 10-year German bunds (0.45%).

What accounts for this massive differential? Central Bank policy, with the U.S. being the only developed country in the world in a tightening cycle. This week the Fed is expected to raise interest rates for the third time since December 2015. In stark contrast, the Bank of Japan (BOJ), Bank of England (BOE), and European Central Bank (ECB) have all cut rates since December 2015.

In viewing the above tables, three questions come to mind:

1) Is the divergence justified?

2) Is the divergence sustainable?

3) Will the BOJ/BOE/ECB move toward the Fed or will the Fed move toward the rest of the world?

On the first question, the only way to justify the divergence is if U.S. growth/inflation were rising while global growth/inflation were falling. This does not seem to be the case.

Germany, the largest economy in Europe, recently reported CPI of 2.2%, its highest level in years. This is not much below the U.S. rate of 2.5%. Overall, CPI in Europe is 2.0% over the past year, far from a deflationary environment.

On the subject of growth, Eurozone real GDP of 1.7% is only 0.2% below the recent reading in the United States of 1.9%.

On the basis of growth and inflation, the divergence does not seem justified. Why, then, are the ECB and BOJ pursuing negative interest rate policies? Because they want to suppress the value of their currencies against the dollar. And suppress they have, which undoubtedly has been helpful in terms of Manufacturing, with Eurozone Manufacturing PMI hitting a 70-month high and Japanese Manufacturing PMI hitting a 35-month high.

Which brings us to the second question: is it sustainable? Only if one believes that there are 1) no adverse consequences to negative interest rates and 2) the U.S. Fed is willing to let the U.S. Dollar go on another historic run higher.

I don’t believe either. There are negative consequences to negative interest rates (if there were not, they would have been used throughout time) and you can be sure the Fed does not want to see the Dollar surge higher again (as it did in 2014-15) based on differentials in central bank rates alone.

Which brings us to the third question: who will flinch first?

We know the Fed is likely to hike this week and wants to hike at least one more time in 2017. Even after these two hikes, though, Fed policy will still be on the easy side with core inflation of 2.2%. Why so easy? They have been slow to move in large part due to the divergence in policy, fearing another run higher in the U.S. Dollar.

With the Dollar index starting to creep up again, the Fed will likely continue to be slow until the rest of the developed world gives some indication that they are starting to move in the other direction. Or until U.S. GDP growth and inflation warrant a more aggressive tightening.

Assuming the U.S. expansion continues this year at a moderate pace and global growth and inflation improve, it would be hard to believe that the ECB/BOE/BOJ will not be pressured to move closer to U.S. policy. That move may only be back to positive or zero interest rates, but even such a move would likely be enough to give the Fed comfort to continue normalization.

For global markets, as I have written since last February, this would be the preferred path. You want to see the Fed continue to normalize this year because it means markets are strong, credit conditions are favorable, and economic growth is improving. The opposite scenario is the one to fear, where the Fed is forced to move toward the rest of the world. Joining the negative interest rate insanity would be a very ominous sign indeed, as the U.S. would likely be facing depression-era conditions. Let’s hope it never comes close to that. Instead: bring on the hikes!