The Fed raises interest rates by 0.75% for the first time since 1994 in an attempt to halt the rush of inflation, which has soared to a 40-year high. The cost of money thus rises in a fork between 1.50 and 1.75%.
The Fed cuts US growth estimates, forecasting GDP growth of 1.7% for 2022 and 2023. Previously it had estimated GDP at + 2.8% for this year. Inflation is expected to stand at 5.2% in 2022 and 2.6% in 2023.
The Fed is “heavily committed” to bringing inflation down to 2%. This is what is read in the final press release issued at the end of the two-day meeting.
The Fed expects interest rates at 3.4% at the end of 2022 and at 3.8% in 2023. This is what emerges from the dot plots, the tables accompanying the final press release. For 2022, reaching rates of 3.4% means a half-point increase at all meetings through the end of the year.
The Fed has the tools and the determination to bring inflation down, Fed Chairman Jerome Powell said. “Interest rate hikes of 0.75% are not to be expected to become commonplace.” Powell pointed out that for July the assumptions on the table are a half point and 75 basis point increase.
Wall Street accelerates with Jerome Powell. The Dow Jones climbed 1.13% to 30,729.80 points, the Nasdaq advanced 2.76% to 11,134.05 points while the S&P 500 posted a progress of 1.75% to 3,800.10 points.
THE SHIELD OF THE ECB
“Today we decided to activate flexibility in the reinvestment activity and we asked our committees to work in an accelerated manner on the conception of new tools to counter fragmentation in the event that the reinvestment is not enough. So in the event that the reinvestment if that wasn’t enough, don’t worry, we’re ready “. This was stated by Klaas Knot, member of the board of directors of the ECB and president of the Nederlandsche Bank, speaking to Young Factor.
The first line of defense of the ECB against the risks of financial fragmentation highlighted by the spreads are the reinvestments of the Pepp pandemic program, said Knot, according to which the decision of the Council of the ECB, convened this morning in an emergency, to ask the technical departments for an acceleration on an anti-spread instrument it is used to have options in case the pandemic program is not enough.
The “main” message of the ECB communiqué is that “in this phase of normalization” put in place “to achieve the objectives of inflation, we could find on our way a hyper-reaction of the markets” and this “could prevent us from doing our monetary policy, to adjust our monetary line. This was stated by Fabio Panetta, member of the Executive Committee of the ECB, speaking to the Econ commission of the EP. “One thing must be very clear”: the anti-fragmentation shield “does not prevent our monetary policy but is a necessary condition to bring inflation back to 2%”, he added.
The ECB has instructed the technical offices to “accelerate the completion of a new anti-fragmentation tool” to be submitted to the Governing Council. This was announced by the ECB after the emergency meeting for the spread alarm.
The Governors of the ECB, in today’s meeting, judged that it was an adequate response to give a mandate to the technical offices to prepare an instrument against financial fragmentation. Mario Centeno, governor of the Portuguese central bank and ECB adviser, said this during a speech in Lisbon reported by Bloomberg. Centeno, in an apparent nod to the discrepancy between a turning point in the sign of monetary normalization and the need to continue to support debts with expansionary measures, said that monetary policy “works for the medium term”.
The emergency meeting of the ECB does not fully convince analysts, who are cautious about the effectiveness, all to be demonstrated, of the measures against the spread announced today and convinced that the market will return to put pressure on the government bonds of peripheral countries. “It is likely that, at least for the moment, this decision will not prevent markets from continuing to push for higher European spreads” while monetary tightening “will continue to put pressure on the more fragile Eurozone countries,” comments Gergely Majoros. member of the investment committee of asset manager Carmignac, according to which the Governing Council “may still be divided on the advisability and necessity of introducing a new ‘stabilization’ mechanism” while flexibility in reinvestments “does not solve the problem sufficiently effectively of fragmentation “. Andrew Mulliner, Head of Global Aggregate Strategies at Janus Henderson, talks about a “somewhat bizarre situation”, with the ECB just six days after ending the purchase of securities, “announces a tool (flexible reinvestments of the PEPP) which he had already repeatedly announced “and promises” an anti-fragmentation tool to be designed. The problem is that “an anti-fragmentation tool is much less suitable for a more restrictive policy” like the one the ECB is forced to adopt to combat inflation. “It would be a bit surprising if the market didn’t try to further test the ECB.” The chief economist of Unicredit, Marco Valli, has a different opinion, according to which the ECB “has finally begun to get serious in combating fragmentation” and expects this risk to be faced with “potentially unlimited purchases”. For Valli, the markets “did well to react positively” and even if “a lot of technical work” is needed to fine-tune the new instrument, the details of which could arrive at the meeting on 21 July, there is “political will” and this “that’s what matters most”.
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