The Federal Reserve raised rates again yesterday at a rate of 75 basis points. A decision that raises rates to the range between 3.75% and 4% and that exerts a drag effect on the interest rates of the rest of the main central banks and on the strengthening of the dollar against the rest of the currencies, beyond to impact asset valuations and the mortgages and loans that Americans have to deal with.
The institution led by Jerome Powell took the helm of the fight against inflation back in March, raising the price of money by 25 basis points in the first rate hike since 2018. The decision was followed by the rest of the banks as they hardened their messages on inflation and their theory that it was a transitory phenomenon caused by the economic reopening after the pandemic faded, to become a merciless battle against the rise in prices, even if this implies ” pain” for citizens and businesses, Powell acknowledged at the Jackson Hole conference in August.
Thus, the ECB is already placing rates at 2%, after two consecutive hikes of 75 basis points, and the Bank of England – which meets today – has them at 2.25%. The exception is the Bank of Japan, which refuses to raise its key rates for now.
At higher interest rates in the US, greater strength of the dollar against the rest of the main currencies. The US currency is being strengthened by the Fed’s policy. The euro has weakened 12.9% against the dollar so far this year – the weakness of the euro is not a priority objective for the ECB as containment is of prices–, a drop that reaches 15% in the case of the pound and 21.8% for the Japanese yen.
The strength of the dollar is also having an impact on company valuations. US companies see the relative value of their revenues shrink when they convert foreign currency billings into dollars. Not a minor situation if one takes into account that S&P 500 companies obtain, on average, 40% of their income and profits from outside the US. On the other hand, non-US companies benefit from the income generated there.
That drop in company valuations can be interpreted, on the other hand, as a catalyst for bargain hunters when the corporate operations market wakes up from its slumber.
Impact in the US
The rise in inflation and the escalation of interest rates implemented by the Fed to counteract it also has a clear impact on US mortgages. The interest rate on 30-year mortgages has exceeded 7% for the first time, a level not seen since 2002. According to data from the financial giant Freddie Mac and the Mortgage Bankers Association, the rate, which stood at 3 14% just a year ago, is causing a slowdown in the country’s real estate market.
Furthermore, the slowdown in the economy of
The US has caused the family savings rate to plummet to 3.1% –in August 2005 it reached 2.5%–. A rate that, with the lockdown derived from the pandemic and the emergency checks distributed by the US Administration, shot up to 33.8% in April 2020.