And that seems to be the case now, he thinks. “One of the ways to test the credibility of the Federal Reserve, for example, is to look at what the bank says it will do with interest rates,” Mujagic says. In this case, the Fed is saying it will raise interest rates. In this case, they want to do it at a little over five percent and they want to keep that rate at that five percent for the rest of the year.
But, Mujagic points out, the market has doubts about this ambition. “The market would like to believe that the Fed wants to go up to 5%, but then it will end the year at 4.25%,” he continues. “That’s one percentage point less than the central bank itself is indicating, and that’s quite a lot.”
Disbelief
According to Mujagic, this is best viewed as pure disbelief. “As if the market were really saying – in all its wisdom – ‘we don’t believe you'”. And the Fed can basically do little about it, he thinks. “The Fed chief will certainly repeat over and over again that interest rates will not be cut in 2023,” Mujagic says. “After all, credibility is the most valuable thing there is, but it has declined. And the danger is that the central bank – to emphasize that the bank means what it says – could continue to raise interest rates for too long.’
With this, the Fed would like to make it clear to the market that they should be taken seriously. “And that’s the danger, because it could just be that the inflation outlook changes in such a way that interest rate hikes are no longer needed,” Mujagic continues. ‘The more credibility the central bank has, the less the bank has to do. After all, the market does your job for you.’
Big mistake
According to Mujagic it is evident that the credibility of the Fed, but also of the ECB, has suffered a severe blow in recent years. Especially since the banks made a big mistake last year when inflation started to rise rapidly. “All the central bankers said it would all be over and inflation would be low again in no time,” concludes Mujagic. “It didn’t happen. And the danger this year is that central bankers will make as big a mistake as they did last year. That they are exaggerating in raising interest rates ».
And so Mujagic makes a statement he thought he’d never have to say: “Central bankers may be overestimating the risk of inflation this year.”