The Fed raises interest rates. ECB, an anti-spread shield – Economy


The Fed raises interest rates.  ECB, an anti-spread shield – Economy
Written by aquitodovale

The Fed gives the green light to the largest rise in interest rates since 1994 to try to temper inflation that has soared to 40-year highs. The central bank raises the cost of money by 0.75% bringing it to a fork between 1.50 and 1.75%. And he expects rates to be around 3.4% at the end of the year, thus suggesting a series of aggressive hikes at all meetings. “We are not trying to induce any recession,” assured Jerome Powell, explaining the maxi-squeeze that will probably be followed by an equally aggressive move in July. For the next month, the president of the US central bank admitted, on the table are “hypotheses of a hike of half a point or 0.75%. We are moving quickly to bring rates to a more normal level”.

With the necessary “flexibility we can bring down” inflation that stubbornly remains at too high levels: it is “well above our targets”, he explained, assuring that the central bank has “the tools and the determination” to fight the price. -prices and hit the 2% inflation target. The surge in prices, notes the Fed, is linked to the invasion of Ukraine by Russia and the lockdowns from Covid in China which, probably, will accentuate the problems with supply chains. An explosive mix that caused inflation to rise to 8.6% in May and sank the confidence of American consumers to an all-time low. “We are strongly committed” to bringing down inflation, Powell repeats like a mantra during his press conference. Wall Street listens to him and, after an initial slowdown, flies with the prices accelerating and the Nasdaq gaining 3%. The Fed – added its president – is “perfectly aware” of the costs imposed by high prices and for this reason has opted for the largest rate hike in the last 28 years. An increase not decided unanimously: Esther George has in fact voted against, preferring a close from half a point. “We will not sing victory until we see concrete evidence of a decline in inflation. Our policy will be affected by the economic data,” explained Powell. The goal is to bring inflation to 2% and maintain a strong labor market, the Fed chairman added, noting however that many of the factors driving inflation are beyond the control of the central bank.

The Fed’s aggressive monetary policy aims to cool demand and the economy. And the central bank’s new estimates indicate a slowdown in GDP, which is set to grow this year by 1.7%, definitely less than the 2.8% previously estimated. Inflation, on the other hand, is expected at 5.2% this year.

And Wall Street ends positively with the Fed. The Dow Jones rose 1.00% to 30,668.27 points, the Nasdaq advanced 2.50% to 11,099.16 points while the S&P 500 posted a 1.41% gain to 3,788 , 25 points.

A new anti-spread shield and the flexible use of 1,700 billion euros of bonds bought with the pandemic program, to be reinvested as they mature. After less than a week of markets in chaos from the tightening announced last Thursday, the ECB turns around, calls an emergency meeting and makes a stronger commitment to put out the fire before it’s too late. The exchanges respond with a strong rebound and the spread closes at 216.5, down for the first time in a week.

“We have decided to activate flexibility in the reinvestment activity and we have 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 does not if that’s enough, don’t worry, we’re ready, “said Klaas Knot, member of the ECB’s board of directors 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,” explained Fabio Panetta, member of the Executive Committee of the ECB, speaking to the Econ committee 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.

The Governors of the ECB judged that it was an adequate response to give a mandate to the technical offices to prepare an instrument against financial fragmentation: so Mario Centeno, governor of the Portuguese central bank and ECB adviser, 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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