The eighth consecutive hike in US interest rates was a much smaller step than previous times. Interest rates rose by 0.50 percentage points in December, while previous times they had also made steps of 0.75 percentage points.
The financial markets reacted positively to the decision. It shows that a more aggressive Fed chief Powell was expected. The irony is that the Fed wants to cool the economy by raising interest rates. But if financial markets lower capital market interest rates and raise equity markets, then its policy is effectively hampered,’ says BNR in-house economist Han de Jong. The surprising thing is that now the markets are even more convinced that the Fed will cut interest rates again before the end of the year. And that could not have been Powell’s intention.”
Motivation
Jerome Powell named three groups of goods and services in the explanatory notes to the interest rate decision. Inflation is down for one group, another group is close, but inflation is still rising for a third group of goods and services. “That’s why the Fed can’t stop now, but because there’s light at the end of the tunnel, it can be delayed,” says De Jong.
However, the end of interest rate hikes is in sight, thinks De Jong. “Significant interest rate hikes have already been implemented, with at least two more to come. But Powell also said that he would rather raise interest rates too much than too little.’
ECB
According to De Jong, there will still be no tempering at the ECB. ‘The ECB started later and is also lagging behind the Fed. And the inflation pattern is a bit more persistent in Europe than in the US.’
De Nederlandsche Bank (DNB) chairman Klaas Knot and former ECB head Christine Lagarde, among others, recently said that prices in the eurozone are rising too fast. Energy prices, in particular, have risen enormously. Knot recently pointed out that inflation has widened since then. Prices for services such as a visit to the hairdresser or shopping at the butcher have also risen sharply. According to Knot, this means that interest rates need to be increased several times. “This afternoon we will see one,” De Jong expects.
Even the central bank will not stop collecting. In December, the ECB also raised interest rates by half a percentage point, adding three quarters of a percentage point to its two previous interest rate decisions. De Jong expects a more aggressive sounding Lagarde for today. “She also attended Powell’s press conference, she saw the market reaction, but she will want to appear determined to bring inflation down further.”