Fed Chief Jerome Powell announced on Wednesday night that he would raise interest rates by 25 basis points. A little less than before, but this “isn’t very surprising,” says Mujagic. ‘Since last year, interest rates have risen by 4 percentage points. We are now looking at the effects of interest rate hikes. Very logical.’
But the Fed chief also said that this rate hike won’t be the last. “He said he is happy with the decline in inflation, to keep it low, a number of conditions will have to be met,” said Mujagic, who listened attentively to Powell’s speech.
For example, economic growth needs to be slightly lower for some time and that’s not the case yet, says Mujagic. “This may look like a recession to many people. Economic growth in America is already declining slightly, but it’s not yet where the Fed would like it to be.
Also, according to Powell, the job market needs to change. ‘At the moment there are still two vacancies for the unemployed. Only when there is more equilibrium in the labor market will the Fed, according to Powell, be convinced of the drop in inflation and stop raising interest rates’.
Credible
By honestly saying that he doesn’t always know, Powell works on his credibility. «Central bankers often have the tendency, even when they don’t know it, to pretend they know everything. Powell honestly says he’s dealing with a lot of uncertainty and he honestly says sometimes he doesn’t know.’ In the long run, that honest story should provide credibility, Mujagic thinks.
Equity markets reacted positively to the Fed’s interest rate decision, with the prevailing belief that interest rate hikes will stop before the end of the year. “It’s often said that the market is always right, but you can question that,” says Mujagic. ‘The market is confused: things are going well, there is no recession and inflation is down. But another maxim is more applicable here: don’t fight the Fed.’