The central banking system of the United States, the Federal Reserve, would like to raise interest rates to six percent. At least that’s what CEO Rick Wieder of asset manager BlackRock thinks. There’s a considerable chance that the Fed will indeed take this step, thinks economist Han de Jong.
The Fed started rate hikes last year at a slow pace. They’ve always ramped up that pace, but in the last couple of fights it’s slowed down again. It is now clear that inflation will continue to disappoint. The question is really: what is needed to really bring inflation under control?’
‘What is needed to really get inflation under control?’
Fed Chief Jerome Powell hinted in recent days that new rate hikes are imminent. He has been a guest in the United States Congress, where he has spoken with Senators and members of the House of Representatives. “The Fed is meeting again in two weeks, the expectation is that interest rates will rise not by a quarter, but by a half percentage point.” The interest is now at 4.5%.
Bigger hole
This further widens the gap between US and European interest rates. The European Central Bank will announce a new interest rate decision next week, last weekend the head of the ECB Lagarde already said that a rise in interest rates by half a percentage point is also very likely here. “The gap won’t close much, but interest rates are actually going up everywhere, because the inflation data here is disappointing too.”
Equity markets are now recovering from the shocks caused by previous interest rate hikes and feel as though the hikes are over. “But that’s a different story now. And the question that remains is: can we get inflation under control without a recession?’
Two evils
If a recession is needed to keep inflation in check, that too is troublesome for stock markets. Because corporate profits take a hit in recessions, and that obviously isn’t good for stock markets either. “It’s actually a bit like choosing between two evils,” says De Jong.
It is clear to De Jong that there is much disagreement within the ECB. “The governor of the Italian central bank has expressed his disappointment that within the ECB it has been decided to be vigilant from one meeting to another. While people like Knot and even the governors of the Belgian and Austrian central banks are simply saying that more interest rate hikes are needed.’
Smelly wounds
Interest rates have been kept low for too long, thinks De Jong. “They really should have started earlier.” That this approach would have been better can be seen in a number of emerging countries. The Brazilian central bank started rate hikes a year before the Federal Reserve, and therefore also before our central bank. Inflation is around five percent, which is quite normal for Brazil. It seems they have everything under control. Gentile healers make stinking wounds, I think.’
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.
