According to the US central bank, the Fed, the risks of inflation are greater than the risk of a recession. This can be seen from the minutes of the latest interest rate decision of 1 February. Then interest rates were raised for the eighth time in a row. According to BNR’s in-house economist Han de Jong, this does not appear to have been the latest increase.
“It doesn’t look like that at the moment,” says De Jong. In fact, the minutes also show that some members of the policy committee would have preferred to raise interest rates by more than 25 basis points on February 1st.
John Williams, the head of the New York Fed and one of the most powerful people in the central bank, emphatically stated yesterday that the inflation target is 2%. So as long as inflation is still well above that threshold, the end of interest rate hikes is not in sight,” says De Jong.
However, the financial markets seem to assume that interest rates will not be raised further. Wrong thinking, says De Jong, now that reducing inflation appears to be more important than preventing a recession. “There’s this wonderful tension between what the Fed is saying all the time and what the markets actually do.”
Capital market
Interest rates on the capital market have been lower than those on the money market for some time. So the long term interest rate is lower than the short term interest rate. “A sign that markets assume the central bank is almost done with hikes,” says De Jong. The stock market has already gone up a lot this year and the dollar has weakened in recent months. “And then comes the weird thing: The capital market’s relatively low interest rates, robust stock market, and weaker dollar actually work against Fed policy,” says De Jong. The Fed wants to limit economic growth. And the more the markets resist, the more the Fed feels compelled to raise interest rates further.”
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recession
And there is also a risk here, thinks De Jong. Continuing to raise interest rates for too long can push an economy into a recession. And then they have to cut interest rates quickly again. This has been found to happen very often in the past.’
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.
