NewsUSAthe path of the falcon

the path of the falcon

This week’s Fed meeting was—again—particularly anticipated not only for its high-profile interest rate announcement, but also because it featured long-term economic projections, including the expected path of interest rates through 2025. A path for the hawks. It is not that the Fed can guarantee that rates will not fall in the next three years, but the image it should project was harsh, suggesting that the price of money will be there, at higher levels than usual in recent years, for quite some time. . A forceful photo to cool down the economy today and, once and for all, reduce inflation. At least, the part of the price increase that is in your hands. It’s the time of the hawks. Like that bird of prey, they are not the fastest in horizontal flight, but when they hunt in a dive they can reach up to 300 km/h. They keep their pulse and, when the time comes, they step on the accelerator, as is now the case with interest rate hikes.

The rise of three quarters of a point, although of considerable magnitude, was expected. The upward trend has become clear, with the projection that the official rate will reach 4.6% in 2023 in the United States. Raising a percentage point this time was on the table, but the Fed doesn’t want to appear desperate either. Each squeeze of 0.75% is an increase in considerable financial costs. How much of an ice cube this is for the price thermometer remains to be seen. All significant changes in interest rates have winners and losers, certainties and risks. We cannot forget that many companies around the world (up to 30% in the United States) show financial vulnerability to varying degrees and, for many, a rise in interest rates puts pressure on their debt, a squeeze on the neck of their viability. Another implication of this more bullish path in the US is the appreciation of the dollar, which fuels inflation via imports in Europe.

There is something curious about these harsh monetary policy announcements. On the one hand, the Fed (also the ECB and others) claims to be following a much more contingent approach than in recent years. This supposes that it acts according to the circumstances and data of each moment because we still do not know for sure if the peak of inflation has been reached and, above all, how long it takes to lower price growth to breathable levels. On the other hand, they project in the long term (also being quite uncertain) with a tough message. However, if the critics of these policies are finally correct and there is a braking pass (a painful and long-lasting recession), they will not only have to stop the rate hikes but even go back. The big question is where will inflation be when the time comes? And that moment seems like the first half of 2023. There are quite a few risks, but the increase in prices is the clearest and most obvious, and sitting idle is not an option.

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Source: EL PAIS

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