Do you know what investors are most concerned about this week? No, it is not the price of oil, nor climate change, nor even the latest episode of the fashion series. What worries them most is knowing when and how the central banks will stop raising interest rates. And why do they care so much? Well, because interest rates are the price of money, and that affects everything: mortgages, loans, investments, inflation…
Central banks have been raising rates for some time to curb inflation, which is when prices rise more than normal. But they cannot go up indefinitely, because that also has negative consequences for the economy. So they have to find the sweet spot where rates are high enough to control inflation, but not high enough to stifle growth. That point is called the end point, and it is the one that you are looking for now with great care and patience.
This week the US Federal Reserve and the European Central Bank, which are the most important central banks in the world, meet. All eyes are on them, because the future of the global economy depends on their decisions. Will they find the end point? How long will they take to do it? What will they do next? These are the questions investors are asking, and perhaps you should be asking yourself too. Because, after all, money moves the world, and interest rates move money.
The European Central Bank (ECB) has already warned us that it will raise rates a bit on Thursday, because it says that the economy is recovering and inflation must be controlled. That means that it will be more expensive for us to ask for a loan or a mortgage, but also that we will earn more for our savings. But this won’t be that long It’s just going to be a little adjustment.
But the Federal Reserve is more undecided. His boss said that he was going to wait, because he did not want to slow down the economic recovery with a rise in interest rates. But it turns out that inflation and the economy are still high, so he may have to raise them too. The problem is that we don’t know when or if he will do it, and that creates uncertainty in the markets. Investors don’t know whether to buy or sell, whether to bet on the dollar or the euro, whether to trust the Fed or the ECB.
According to some experts, such as those at Bank of America, the US economy is holding up well to the downpour of the pandemic and inflation, and the Fed could hint that even if it doesn’t raise rates now, it will soon. To confirm this hypothesis, we will have to watch the inflation data that will be released soon, just as the Fed meeting begins. If the data comes out high, the Fed may get nervous and decide to press the red button.
But a surprise should not be ruled out. Last week two central banks, Australia and Canada, raised rates without warning. They said that inflation continues to be a problem and needs to be fought harder. Will the Fed be as brave as they are? Or will you prefer to wait and see how the situation evolves? We will know soon. In the meantime, let’s cross our fingers and hope the Fed doesn’t give us a scare.
Will the Fed raise interest rates or keep them unchanged? This is the million dollar question asked by investors, analysts and economic journalists. And it is that the decision that I make the US central bank will have consequences for the whole worldincluding the ECB, which also has to deal with inflation and growth.
The US Federal Reserve (Fed) has to decide whether or not to increase the price of money. On the one hand, the US economy is recovering strongly from the crisis caused by the covid-19 pandemic. This causes inflation to skyrocket. If the Fed wants to prevent prices from spiraling out of control and eroding the purchasing power of citizens, it may have to raise rates to cool demand and dampen credit further.
On the other hand, The Fed also has to keep in mind that it doesn’t have to raise interest rates too much because that would hurt the economy.. An excessive increase in rates could have negative effects on consumption, investment and employment, thus stifling the economic recovery and causing a deeper and longer recession than necessary. Therefore, the Fed has to be prudent and balanced, adjusting rates according to developments in inflation and growth.
The Fed faces a dilemma: Should interest rates rise or not? There is no certainty about what Powell, the Fed chairman, will do, but most of the market expects it to keep rates unchanged at the next meeting. However, that is not certain. Perhaps Powell prefers to wait for more data before acting, or perhaps he wants to surprise the market and demonstrate his authority.
Whatever it is, whatever you do the Fed will influence what the ECB does. Lagarde, the ECB president, has a similar problem to Powell’s: high inflation and a weak economy. We already know that the ECB is expected to raise rates by a quarter point this week, and perhaps another quarter point in July, but not much more. Lagarde will have to find the balance between controlling inflation and supporting growth, without blindly following in the footsteps of the Fed.
In short, this week will be key to knowing the direction of monetary policy in the US and Europe. Central banks will have to decide whether to put their foot on the brake or keep stepping on the accelerator. And we will have to be attentive to their signs and their words. Because as the saying goes: When you see your neighbor’s beard peeling, put yours to soak.
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