“Wall Street and the Fed failed to predict 2022.” The headline of an article in the Wall Street Journal leaves no room for doubt: the US central bank has made a mistake in calibrating its interventions. Because it believed inflation in 2021 was transitory, the Fed waited until March of this year to raise interest rates. Thus, to chase down prices, it was forced to launch no less than four maxi hikes of 75 basis points. Rates are now fluctuating between 4.25% and 4.50% and, finally, it seems that inflation has returned to a downward path. At the end of November it fell to 7.1% annually from 7.7% in October. However, the price paid was high. The Standard & Poor’s index has lost 19% in one year and is likely to record its worst performance since the 2008 financial crisis.
However, the Fed’s choice to engage in an all-out fight against inflation was almost inevitable. In fact, it had to react to an overheating of the economy, triggered by the lavish anti-Covid subsidies launched by the Biden administration. A completely different situation from that of the Eurozone where the rise in energy prices was, first of all, the driving force behind inflation. However, the ECB has decided to follow the Fed: repeated increases in interest rates, the last one on December 15, when the board decided to raise them by 50 basis points, bringing the main one to 2.5%. In short, we wanted to counter supply inflation, due to energy price increases, with the same tool that is used to combat demand inflation, caused by too lively consumption. The results are unforgiving: in November inflation was still 10% (12.6% in Italy). Prices have obviously slowed down compared to +10.6% in October, but with the risk of recession becoming more and more concrete.
It is no coincidence that the decision of 15 December to raise rates and reduce the budget, allowing 15 billion euros of government bonds to mature each month starting from March, aroused the harsh reactions of various representatives of the Italian government. In fact, the spread soared beyond 220 basis points, while the yield on the ten-year BTP came close to 4.5%. Reactions which, however, have not affected Frankfurt’s determination to continue with the monetary tightening. The ECB, said Isabel Schnabel, a German member of the executive committee, must “achieve an interest rate that is high enough to bring inflation back to 2%”, i.e. higher than 3%. In short, from the parts of Frankfurt I don’t want to loosen the grip. “We can expect further opposition and we must resist,” Schnabel said, adding that “governments in general don’t like rate hikes very much” “because they make it more expensive to issue new debt.”
And this is precisely what put Palazzo Chigi on alert. In fact, next year Italy will have to issue about 320 billion euros of government bonds. All without the umbrella of the ECB. Which has already reduced its purchases of Italian debt in recent months, despite the reinvestments promised through the two programmes, the PSPP and the PEPP. In November, the securities purchased with the PSPP, interrupted in July, amounted to 429.4 billion euros, down by almost 3 billion on October. This while in the context of the pandemic Pepp, which ended in March, between October and November the Italian securities held decreased by 800 million euros, settling at 287 billion euros.
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