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Central banks are not going to quit | Opinion

Central banks are not going to quit | Opinion

After a difficult week, with a lot of turmoil in the financial markets, due to the fear of aggressive increases in the reference interest rates by the Federal Reserve, investors were anxiously awaiting the conclusion of the meeting of the Open Markets Committee on Wednesday .

Despite the fact that a high percentage of analysts considered, until the last minutes, that a rate increase of 100 basis points could be announced (it was the first time since 1984 that such an increase had been agreed in one move), in the end it was not there were no surprises and the decision was to increase by 75 basis points, leaving the reference interest rates between 3.00% and 3.25%.

However, despite sticking to the widely expected script, the impact on the market was not one of moderate relief, as has happened on other occasions when decisions were adjusted to majority forecasts, but when this they fear more.

Perhaps it was because of the idea of ​​showing the strength that needed to be shown at a time when inflation began to show its leg, more than a year ago, or because of fear that the idea was was being followed by members of the Fed. (If a downward movement consisting of equities and bonds is generated in a country with the characteristics of the United States, the measures taken to stop the steep rise in prices will be taken), the fact is that the effect seems to have been achieved .

The new economic forecasts shown (all growth indicators fall and the strength of inflation continues for a longer period than originally expected) and Powell’s subsequent speech brought the market and many investors realize that the impact of monetary policy measures. strong, and reinforce the fear of greater impact and a more likely retreat.

It is also true that the harsh message is available justifying the evolution of inflation, very close to maximum, with a strong rebound in August its basic component and, in short, very resistant to fall, especially putting in consider that the number of components is inflated. of the CPI is also at historically very high levels, so much so that more than half of its components exceed the 2% level, which has not happened since the 1980s.

Powell emphasized that the goal was to beat inflation, but that there was no painless way to do it, and that he knew that high interest rates, weak economic growth and a weak labor market would be difficult for some citizens. standing. who have lived very well for almost ten years, but the main thing was to curb inflation once and for all.

But how high will rates go? The Committee’s forecast goes through rates that would reach 4.4% by the end of this year and 4.6% in 2023, a heavier change than expected in previous meetings. Going forward, they expect benchmark rates to fall to 3.9% in 2024, and 2.9% in 2025. This means a fourth consecutive increase of 75 basis points could be possible and will happen at the next meeting , which will be held at the Conference. beginning of October. That is, more increases than originally planned and more continuous maintenance at high levels. The bet on the Fed going backwards, after the end of the rate hikes, is starting to be very limited.

As a result, the stock market index representing the world’s largest reference, the S&P 500, ended close to the lows of the session, losing the reference level of 3,900 points and leaving more than 20% to so far this year. if it continues at the end of the week, that would mean we are officially in a bear market, which could result in testing new supports and could drag other indices down.

Now there is also another concern: the downward revisions that companies may make in their guidance and those that analysts who follow the values ​​may make. High interest rates will always push up valuations.

The yield on the two-year Treasury bond stands at 4.10%, which has not been seen since September 2007. The inversion of the rate curve is becoming more apparent, and it is already known what this scenario represents: a recession.

Powell’s message emphasized the need to move the entire real yield curve positively.

As a result of this more severe recession, long-term inflation expectations tend to be moderate; maybe at the end of the first quarter of 2023 we can see the first signs.

The more aggressive and firmer message from the Fed, which the main Western central banks will follow, does double damage to stocks and bonds: because of the rise in short-term rates and because of the increase in economic risk. As a result, we reinforce our message that the bear market is not over yet.

The authors are columnists for Reuters Breakingviews. The comments are yours. The translation of Carlos Gomez downit is his responsibility Five days

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