November 28, 2022

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The Federal Reserve raises interest rates. The European Central Bank, an anti-proliferation shield

The Federal Reserve gives the green light to Biggest interest rate hike since 1994 To try to curb inflation, which has risen to its highest level in 40 years. The central bank raises the cost of money by 0.75%, bringing it to a fork between 1.50 and 1.75%. He expects rates to be around 3.4% at the end of the year, indicating a series of sharp increases across all meetings. “We’re not trying to create any recession,” Jerome Powell emphasized, explaining the maximum pressure likely to be followed by a similarly aggressive move in July. For the next month, the US central bank president admitted, that on the table “the assumptions of a half-point hike or 0.75%. We are moving quickly to raise interest rates to a more normal level.”

With the “necessary flexibility we can bring down” inflation that remains stubbornly at very high levels: he explained that it is “well above our targets”, stressing that the central bank has the “tools and determination” to fight the rate. The target inflation rate was 2%. The Fed notes that the price hike is linked to the invasion of Ukraine by Russia and the lockdowns from Covid in China which are likely to add to supply chain problems. An explosive combination that pushed inflation to 8.6% in May and plunged US consumer confidence to an all-time low. “We are very committed” to lowering inflation, Powell repeats like a mantra during his press conference. Wall Street is listening, and after the initial slowdown, prices are accelerating with the Nasdaq up 3%. The Fed – added its boss – is “fully aware” of the costs that higher rates impose, which is why it has chosen the largest interest rate hike in the last 28 years. Unanimously decided increase: Esther George voted against it, favoring a half-point shutdown. “We won’t sing victory until we see tangible evidence of lower inflation. Our policy will be influenced by economic data,” Powell said. The Fed chief added that the goal is to raise inflation to 2% and maintain a strong labor market, noting that many of the factors driving inflation are beyond the control of the central bank.

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The Fed’s aggressive monetary policy aims to calm demand and the economy. The central bank’s new estimates point to a slowdown in gross domestic product, which is set to grow this year by 1.7%, which is certainly lower than the previously estimated 2.8%. On the other hand, the inflation rate is expected to be 5.2% this year.

And the Wall Street ends positively The Dow Jones rose 1.00% to 30,668.27 points, the Nasdaq advanced 2.50% to 11099.16 points while the S&P 500 posted a 1.41% gain to 378,825 points.

European Central Bank shield
A new anti-proliferation shield and the flexible use of 1,700 billion euros of bonds purchased with the pandemic programme, to be reinvested as they mature. After less than a week of chaos in markets from the tightening announced last Thursday, the European Central Bank turned around, called an emergency meeting and made a stronger commitment to extinguish the flames before it was too late. Stocks respond with a strong bounce and the spread closes at 216.5, down for the first time in a week.

“We have decided to activate flexibility in reinvestment activity and have asked our committees to work in an accelerated manner on conceiving new instruments to counter retail in the event of insufficient reinvestment. So in case of insufficient reinvestment,” said Klaas Knott, ECB Governing Council Member and Nederlandsche Bank President, Speaking to Young Factor, “Not if that’s enough, don’t worry, we’re ready.”

Knott said that the ECB’s first line of defense against the financial fragmentation risks highlighted by the differences is the reinvestment of the Pepp pandemic programme, which in accordance with the decision of the European Central Bank Council, which convened this morning in the event of an emergency, ask technical departments to accelerate the anti-proliferation tool, as the Use for options in case of insufficient epidemic program.

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The “key” message of the ECB statement is that “at this stage of normalization” set “to achieve inflation targets, we could find on our way an overreaction from the markets” and this “could prevent us from , speaking to the Economics Committee of the European Parliament, that the implementation of our monetary policy, to adjust our monetary “line”. He added, “One thing must be very clear: the anti-fragmentation shield “does not prevent our monetary policy but is a necessary condition for bringing inflation back to 2%”.

The European Central Bank has instructed technical offices to “accelerate the completion of a new anti-fragmentation instrument” for submission to the Governing Council.

ECB governors saw it as an appropriate response to give a mandate to technical offices to prepare a tool against financial fragmentation: so Mario Centeno, the governor of the Portuguese Central Bank and ECB adviser, during a speech in Lisbon reported by Bloomberg. . In a clear sign of the discrepancy between a turning point in the signal for monetary normalization and the need to continue supporting debt with expansionary measures, Centeno said monetary policy is “working over the medium term.”

The emergency ECB meeting does not convince analysts, who are quite cautious about the efficacy of, whatever will be shown, of actions against the spread announced today and who are convinced that the market will return to put pressure on government bonds in peripheral countries. “It is possible that, for now at least, this decision will not prevent markets from continuing to press for an increase in European spreads” while monetary tightening “continues to put pressure on the more fragile eurozone countries,” said Gergeli Majoros. Asset manager Carmignac’s investment committee, under which the board may remain “divided over the advisability and necessity of introducing a new ‘stabilization’ mechanism” while flexibility to reinvest “does not effectively solve the hash problem.” Andrew Mulliner, Head of Global Aggregate Strategies at Janus Henderson, speaking of a “kind of strange situation,” with the European Central Bank just six days after ending its securities purchase, “announced an instrument (flexible reinvestment for PEPP) that it had repeatedly He repeatedly “promised” designing an anti-fragmentation tool. The problem is that “an anti-fragmentation tool is much less suited to a more restrictive policy” such as the one that the European Central Bank is forced to adopt to fight inflation. “It would be a bit surprising if the market did not try to do more of tests for the European Central Bank.” Unicredit chief economist Marco Valli has a different opinion, saying that the ECB has “finally started to get serious on anti-retail” and expects that risk to face “potentially unlimited buying.” Valli, the markets have “well done well” and even if “a lot of technical work” is needed to fine-tune the new instrument, details of which could reach the meeting on July 21, there is “political will” “and that is what matters most.” .

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