2023-08-27 14:47:45
New York investors will have to adjust to less clear signals from the central banks in the future. The heads of the US Federal Reserve and the European Central Bank (ECB) signaled at the central bank meeting in Jackson Hole on Friday that they want to retain great flexibility with regard to their further steps.
Both Fed Chair Jerome Powell and ECB President Christine Lagarde emphasized that further interest rate hikes could be necessary. “The battle against inflation is not yet won,” Lagarde said in her Jackson Hole speech. Nevertheless, she left open whether she intends to raise interest rates again at the next meeting in September. Powell didn’t show his cards either.
This is a departure from the previous strategy, in which central bankers have often communicated very clearly whether interest rates will rise at upcoming meetings. The many rate hikes, some of them unusually large, since last spring have had an effect. Inflation rates have fallen in recent months, even if they are still above the two percent target set by the central banks in the USA and the euro area at 3.2 and 5.3 percent.
“Signals from the economy are too ambiguous”
But the further the fight against inflation progresses, the more difficult it becomes to determine further strategy. “Neither Powell nor Lagarde want to commit at the moment when the last rate hike will come,” said Barclays chief economist Christian Keller. “The signals from the economy are too ambiguous, so they have to be as flexible as possible.”
With this, Powell wants to keep the bond markets in check. The US 10-year Treasury yield was just over 4.2 percent on Friday, after rising to 4.36 percent during the week — the highest since 2007. 10-year Treasury yields are a common measure of the long-term interest level.
In his speech in Jackson Hole on Friday, Powell pointed out that the US economy had recently grown more strongly than many had expected. The labor market is also still robust and the housing market is already picking up again. “We are watching for signs that the economy is not slowing down as expected,” the Fed chair said.
For him, it is now about the right risk management: If inflation picks up again, interest rates could rise further. At the same time, it would be difficult to say to what extent the interest rate hikes so far will affect economic output and the labor market.
Typically, it takes 12 to 18 months for rate hikes to take full effect. However, should the world’s largest economy weaken more than expected, further rate hikes would not be necessary. “The risks are roughly balanced,” believes Diane Swonk, chief economist at KPMG.
With the required leeway, Powell wants to be able to react quickly in the coming months without causing uncertainty in the world’s largest market for fixed income securities. Market participants are currently divided on how yields will develop: If there is a recession, this could prompt the Fed to cut interest rates again. That would lead to falling yields and rising bond prices.
However, if inflation persists, the Fed could hike rates further, which could also push 10-year Treasury yields higher. Powell said in his speech on Friday that he is prepared to make further rate hikes if necessary. The key interest rate in the USA is currently in the range of 5.25 to 5.5 percent.
Unemployment figures and economic data eagerly awaited
Pimco economist Tiffany Wilding says it is “not out of the question” that the Fed will leave interest rates at current levels and raise them further in the coming year if US consumers and the economy remain resilient.
Monetary authorities “can afford to be intentionally vague on purpose,” said David Zervos, chief economist at investment bank Jefferies, on CNBC.
Investors, however, will follow the economic data in the coming weeks all the more closely. Unemployment figures for August will be released in the US on Friday. Ahead of the next Fed meeting, there will also be new data on inflation that will influence central bankers’ decisions.
US stock market expert Koch: How long will interest rates remain high?
Most market participants had recently assumed that the Fed would keep interest rates stable in September and could raise them again in November. “Given the progress so far, we’re in a position to proceed cautiously in the upcoming meetings,” Powell said. He would continue to evaluate the latest economic data and the “prospects and risks”.
>> Read here: Lagarde – “The fight against inflation is not yet won”
After his speech, however, the probability of another rate hike in September increased, according to data from the options exchange CME. Market participants now see the probability at around 20 percent, a week ago they still saw it at eleven percent.
“Powell is a sobering example of just how far the Fed is willing to go to curb inflation,” said KPMG’s Swonk. He wanted to prevent inflation “being fueled again by the recent acceleration in growth”.
In her speech, ECB President Lagarde also warned of the economic consequences of climate change and the recent geopolitical tensions. These developments could also perpetuate inflationary pressures and complicate the work of central bankers. “If we face larger and more frequent shocks, companies could pass on cost increases more consistently,” Lagarde said.
At the same time, higher interest rates make it more difficult to invest in renewable energies, which are very capital-intensive. Nevertheless, it is important that central banks “form an anchor for the economy”, said Lagarde, “and ensure price stability in accordance with their respective mandates”.
More: The unspoken message of the central bankers – a comment
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