While Fed Chief Jerome Powell indicated last week that he would continue to raise interest rates, interest rates in the capital markets have indeed declined. “We are now in a situation where capital market interest rates and equity prices frustrate the central bank’s plans,” says BNR economist Han de Jong.
Something strange happened last week, De Jong looks back. The US central bank (the Fed) has announced that it will raise interest rates further. But capital market interest rates have indeed fallen, and quite substantially. And the stock market that has soared.’
This is certainly not the response the Fed had hoped for. Because higher interest rates on principal and upbeat stock prices actually go against central bank policy. “The market is actually telling Powell, you can still raise interest rates now, but first you’re going to have to lower them again.”
Powell doesn’t let himself be pressured
However, De Jong doesn’t think Powell and the Fed will let the market pressure them. Financial analysts in the US expect the central bank to hike interest rates by a quarter of a percentage point in March and do it again in May. This would bring the official interest rate to 5.25%. “Compare that with the interest on principal over ten years, which is 3.65 percent.”
“If Powell finally manages to convince the market, then he will have to go up quite a bit,” says De Jong. “But I doubt that will happen.”
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
