The interest rate hikes are not over because inflation is still too high. If you extract food and energy from those figures, you’re still left with 5.4% inflation. ‘If you look at the month-to-month figures, there’s also been an acceleration since December of last year. So there is absolutely nothing about yesterday’s inflation rate that would make the Fed say, “Ladies and gentlemen, we’ve stopped raising rates.”
“There is absolutely nothing to make the Fed say, ‘Ladies and gentlemen, we have stopped raising rates'”
Instability
Bank failures and fears of financial instability aren’t making the Fed’s job any easier. Quite the contrary. The Fed already had to navigate between economic interest (meaning: stop raising interest rates fast enough) and low inflation (meaning: raising interest rates), but now, according to Mujagic, a new dimension has been added. Namely, consequences of a decision for financial stability or instability. “So it’s not getting any easier for the Fed.”
Debts
Of course, it’s a short step from financial instability to the issue of debt, a source of instability. ‘Our economies simply grow massively if we all borrow and spend money together. This means that you will accumulate debts». Those debts were already very high in 2008 and have only increased since then. Now it’s important to address that 6% inflation with many more interest rate hikes, but that’s not possible because those debts are too high. “You don’t know how businesses and families react to that.”
Also listen | Saving SVB costs taxpayers nothing? “There’s No Free Lunch”
According to Mujagic, these high debts are an obstacle for central banks. After all, they can’t set their interest rates higher than the 2007 peak, when they should. “It will be impossible.” Meanwhile, US markets even seem to assume that the Fed will cut interest rates. Difficult in this climate, thinks Mujagic.
“You can’t stop as a Fed or your credibility will be destroyed”
The Fed is beset by conflicting imperatives: “There are three dimensions that intertwine. One dimension calls for further rate hikes, the other calls for an end to rate hikes. You cannot leave the Fed or your credibility will be destroyed. If Silicon Valley Bank hadn’t collapsed this weekend, the interest rate decision next week would have been easy: another 50 basis points. You can’t do it now, but you can’t do anything either. So next week I think the rate hike will be 25 basis points.”
Listen to all episodes of Macro with Boot and Mujagić