Status: 07.04.2022 11:10 a.m.
The US Federal Reserve is now pulling other strings. The Fed wants to offset extremely high inflation rates with significant increases in interest rates. This is also putting pressure on the ECB. Can savers have hope again?
The minutes of the most recent meeting of the Federal Open Market Committee (FOMC) published last night speak for themselves: the Federal Reserve is preparing itself and the markets for aggressive rate hikes and a rapid reduction in its balance sheet. total. The balance total will be reduced by up to $95 billion each month.
In addition, many members assume that one or even several major rate hikes could be decided at future Fed meetings. This is an emergency monetary policy brake being put in place by the Fed. “The Fed is serious about fighting against inflation. There is no more dithering,” says Thomas Gitzel, chief economist at VP Bank.
Key interest rate at 2.0 percent in three months?
But how determined are central bankers around Fed Chairman Jerome Powell when it comes to interest rate hikes? In any case, market participants are confident in the US monetary authorities in the coming months, as a look at CME Group’s Fed Watch tool reveals.
Consequently, an overwhelming majority of 79 percent currently expect the Fed to raise interest rates by a whopping 50 basis point increase to between 0.75 and 1.0 percent at its next meeting in early May. Big interest rate hikes are also being priced in for upcoming meetings in June and July, so the key interest rate could already be between 1.75 percent and 2.0 percent in three months. By the end of the year, it could even be 2.5 to 2.75 percent.
Fed misses target by 300 percent
The fact that central bankers are now suddenly applying so much pressure and pulling the reins on monetary policy so hard has a serious undercurrent: rapidly rising inflation rates. Consumer prices in the US rose 7.9 percent in February. This was the strongest increase in 40 years. At the same time, the inflation rate was about 300 percent above the Federal Reserve’s 2 percent target.
The US Federal Reserve has lost control of the currency devaluation. The Ukraine war is fueling energy and commodity prices around the world. Supply chains, further disrupted as a result of the coronavirus pandemic, are also causing prices to rise.
Deutsche Bank predicts recession
Central bankers are effectively trying to slow down the economy and thus reduce inflationary pressure. The only question is: How far can the Fed go without completely crippling the US economy?
On Tuesday, Deutsche Bank was the first major bank to emerge, predicting a 20 percent stock market crash and a summer recession for the US. She justified this with an unfavorable cocktail of geopolitical risks from the Ukraine war. and a massive tightening of US monetary policy.
The bond market had also recently sent negative economic signals: the yield curve inverted. In recent years, this has been an almost infallible harbinger of a recession.
Fed model: what does the ECB do?
As fast as the Fed moves down the path of rate hikes, the question begs: What are the other central banks really doing to counter high inflation rates? After all, the Fed did present some sort of plan for balance sheet reduction and interest rate hikes last night, which other central banks can also use as a guide.
The pressure on the European Central Bank to finally pick up the reins on trade and do something about historically high inflation rates has increased significantly recently. For example, the head of the Austrian central bank, Robert Holzmann, considers it possible that the ECB’s zero interest rate policy will end at the end of the summer. Also from the point of view of Bundesbank President Joachim Nagel, the ECB could initiate a rapid change in interest rates. The saver will soon be able to look forward to higher interest rates again, Nagel told the ARD business magazine. more less.
Interest rates are rising rapidly
What Nagel doesn’t mention: Interest rates are unlikely to be able to offset high rates of inflation for any foreseeable long period of time. The real interest rate, that is, the nominal interest rate minus the rate of inflation, is likely to remain in negative territory.
Meanwhile, rising interest rates have what it takes to shatter many real estate dreams. According to the Frankfurt-based financial consultancy Max Herbst (FMH), mortgage interest rates for a 10-year loan have soared from 1.0 percent at the beginning of the year to 2.06 percent now. The change in trend in interest rates that the ECB has yet to implement has long since touched the hearts of the German population.