Central banks are raising interest rates one after another and currently see fighting inflation as a top priority. But apparently the markets are expecting the difficult course to end soon.
Anyone who observes the current trend of the stock markets rubs their eyes in amazement. Investors appear to be expecting central banks in the US, the euro area, the UK and possibly Switzerland as well may soon slow the pace of rate hikes. But in reality, different tones are being heard from the central bankers themselves.
For Wednesday’s Fed decision, economists almost unanimously expect a further hike in key US interest rates by 75 basis points. It would be the fourth consecutive rate hike of this magnitude.
Too aggressive central bankers?
At the September FOMC meeting had Jerome Powell stresses that a recession cannot be ruled out. “Nobody knows if this process will lead to a recession and, if so, how severe it would be.”
And since then, the metrics have provided no indicator to justify taking your foot off the accelerator. Inflation in the US, at 8.2% recently, is still too high and the labor market is showing only a slight slowdown.
A question of credibility
Central banks are also fighting for their credibility with the help of interest rate hikes. They want to show that they are doing everything to defend monetary stability. The ECB in particular has been accused of reacting too hesitantly to rising prices about a year ago, long before Russia invaded Ukraine.
The latest statements by the head of the ECB also point in this direction Cristina Lagarde (Photo below) to understand. Interest rates still have room to rise, he said aloud “Bloomberg” (Paid article) in an interview with the Latvian site “Delphi Business”. “The goal is clear and we have not yet achieved it”. He did not provide a figure for the maximum level that interest rates will eventually reach. Last week, the European Central Bank raised interest rates by a further 75 basis points.
Inflation in the euro area hit a new record of 10.7 percent in October.
Lagarde acknowledged that the likelihood of a recession has increased. “Inflation is still consistently too high in the eurozone,” she said. “The longer inflation remains at this high level, the greater the risk of it spreading throughout the economy. So consumers and businesses will also start to expect higher inflation in the future, and that’s dangerous. “
Slowdown since December
Some economists now assume the Fed could raise rates by “only” 50 basis points as early as December. The first interest rate cuts are even planned for autumn 2023.
So, according to Wednesday’s decision, all eyes will be on the formulation of the prospects and experts will try to read the signs of the step forward.
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