The US Bank (Fed) yesterday issued the interest rate decision that remained, as expected, unchanged, when for the first time the term “transient” (transient) was omitted from the wording of the announcement, which better described the inflation that raised its head as a result of the corona crisis. Beyond that, the Fed has doubled the rate of reduction in the monthly bond purchase plan it makes each month (by $ 120 billion). Now, the Fed will reduce the volume of purchases from $ 15 billion to $ 30 billion each month, so the purchase plan will end March 2022 – paving the way for interest rate hikes.
Is this what the market expected?
Already about two weeks ago, Fed Chairman Jerome Powell prepared the ground for yesterday’s hawkish announcement when he called for abandoning the term “transitory” regarding inflation, saying that at the upcoming meeting (the one that ended yesterday) Fed members will discuss doubling the rate of bond purchase reduction , So it can be said that on this plane there were no surprises. As for interest rates, there may have been a slight surprise to the Fed’s determination to keep pace with rising rates, highlighting the Fed’s concerns about inflation.
And how does all this relate to inflation?
If until recently the labor market was the main factor troubling decision-makers at the US Bank, now that the labor market is recovering but inflation remains high, inflation has undoubtedly taken its place as a factor that led the Fed to change policy and hasten the reduction of ultra-expansionary monetary expansion The corona.
What is the new expectation of raising interest rates?
The Fed has provided a forecast that next year the interest rate will rise by 3 beats. Last time Fed members were divided on whether to raise interest rates in 2022. The Fed’s points chart shows that Fed members expect 3 more interest rate hikes in 2023 and another 2 hikes in 2024. Powell made it clear at a press conference following last night’s interest rate hike that the rate hike will not be done in parallel with bond purchases so the plan must end before the rate hike, and that too depends on future developments, such as a recent health threat.
So why are markets happy with the Fed’s announcement?
Markets rose in the face of the certainty that the Fed provided to markets and in fact recognized the fact that inflation was not temporary. That is, most of the “hawkish” announcement was known and only the forecast for a 2014 rate hike moved to 2022, so in fact nothing happened in terms of the Fed’s announcement. The Fed is still talking about 8 interest rate hikes in the coming years and even then it will be at a very low level and that does not scare the market. In fact, on the contrary, if there is 7% inflation in the US and the Fed is only talking about an interest rate of 2% in a few years the real interest rate will probably remain very very low and here the road to optimism in the stock market is paved.
Following the Fed, are we expecting a wave of interest rate hikes around the world?
Some of the world’s central banks have already begun to raise interest rates in the face of inflationary pressures, such as Poland, Hungary, New Zealand, and more in order to curb inflation should it spiral out of control. The inflation rate in these countries that have raised interest rates has reached levels of around 7% – which has raised criticism from the public in the shadow of the fear of losing control of the economy. An exception of course is Turkey, where politics intervened in monetary policy and the central bank actually lowered interest rates despite inflation. The result: continued currency collapse, downgrading and speculation about Erdogan’s intentions towards his people.
And what about Israel?
Israel, again, in a good place from below. The consumer price index for November, published yesterday, surprisingly indicated a 0.1% drop in the consumer price index. This is the second time in a row that the consumer price index is surprisingly downward, perhaps mainly due to the strong shekel. Last month it was the flight and footwear and clothing items that dropped unexpectedly, and also in November these items dropped, but apart from them there was a horizontal drop in prices, which places Israel in a prominent place from the bottom in terms of inflation, leaving the Bank of Israel even more space than before interest rates. Economists actually predict that the Bank of Israel will raise interest rates after the US, perhaps by one stroke at the end of next year.