The fact that the Fed has raised interest rates again by a quarter of a percentage point came as a surprise to few people. Yet yesterday was an emotional evening, says economist Edin Mujagic. “It had all the ingredients for a boring evening, but what happened next caused some fireworks.”
Fed Chairman Jerome Powell is a “master communicator,” according to Mujagic. Yet yesterday he faced an almost impossible task. «He had to say something about the situation in American banks, because a lot is happening there. But anything he could have said about it was wrong, so he said the only thing he could say, that banks are sound and unruly.’
Credibility
A striking statement, because current events do not exactly show that all banks are in particularly good shape. For example, last night it was announced that a smaller US bank was in trouble, Pacific Western Bank. Yet that hasn’t dented Powell’s credibility, Mujagic says. “The only alternative was for him to say he’s very worried too, but then there’s really a lot of chaos in the markets. This was an impossible task and no one could have done it better than this man.’
Mujagic also thinks it wise that Powell has not commented on what the Fed might do in the coming months. After all, you don’t know what the economy and inflation will do. “And then you just have to send a very boring message to the market,” Mujagic says. “Otherwise there is the risk of having to completely change course within a few months, and this would not help the bank’s credibility”.
Expectations
Although Powell indicated that the central bank is pausing interest rate hikes and will not cut for now, the market expects more cuts this year. “The market is basically saying that the Fed will cut interest rates from September and early next year they will be 4%, one percentage point lower than now.”
According to Mujagic, this means that an exciting period could lie ahead for investors and economists. If the Fed is right and interest rates aren’t cut, the market won’t be happy, he says. “Because the expected interest rate cut has been built into the price, so if it doesn’t come, you’re going to have to take it out again.” On the other hand, according to the economist, it’s not good news if the market gets what it hopes for. “Because Powell said yesterday they only do it if the economy is so bad they have to. So it’s a last resort, and I can’t imagine it doing very well in the market.’
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.
