Perhaps there is no place where the sensitivities of Americans can be measured as well as in the stores of the retail icon Walmart. The price of milk in the country has increased by 16 percent, and that of eggs by 33 percent. At the beginning of the week, the retail chain even had to admit publicly that customers are only buying the bare essentials because of the rising prices. Now one could say: Just three days later, the US Federal Reserve reacted to the Walmart cause and screwed up the key interest rate in the country by 0.75 percentage points – all at once.
What sounds small is a huge step in the world of central bankers. Interest rate hikes of a quarter of a percentage point are actually normal, but now the monetary watchdogs are screwing up the key interest rate by a factor of three. And this despite the fact that they had already approved such a triple rate hike at the last interest rate meeting in June. Mind you: At the beginning of March, what is probably the most important interest rate in the world was stuck at zero, now the US key interest rate is in a range between 2.25 and 2.5 percent. “They are determined to fight inflation,” says US expert Christian Scherrmann from Deutsche Bank’s fund subsidiary DWS.
If you want to understand the reason for this drastic monetary policy, you only have to look into the wallets of the Americans. The same coins are still jingling in the coin compartment, but fewer and fewer of them can be bought. Inflation in the United States climbed to 9.1 percent in June. Supply chain problems, high energy prices and lavish wage increases are driving prices up between Alabama and Wyoming. “The most important enemy of the Fed is now inflation,” says Frédéric Leroux from the fund house Carmignac.
Last minute panic drove the central bankers
Key interest rate figures such as the new range of 2.25 to 2.5 percent may seem abstract, but the logic behind these numbers is very concrete: Higher key interest rates make loans more expensive, US private individuals are not spending as much money. In order to be able to continue selling their products, companies have to lower their prices, inflation would at least fall according to the textbook. So far, there is little evidence of this in the data for the current months, but looking ahead, the Fed’s strategy seems to be working: Many Americans expect annual inflation to be just 2.8 percent for the next five years, a rate that is significant below the current value.
But every interest rate hike by the central bank also has side effects: While higher key interest rates are intended to curb inflation, they can dangerously stall the economy. When interest rates rise, companies have to pay more for loans, for example. There are already early indicators pointing to weaker growth in the USA and even suggesting a possible recession.
According to experts, a kind of last-minute panic among the central bankers may have contributed to the sharp interest rate move: if they had not raised interest rates significantly now, the key economic data could have clouded over significantly by the time of the next interest rate decision. Ultimately, the central bankers would then have been able to take less harsh action against inflation. The significant interest rate hike of 0.75 percentage points was therefore probably also a tactical maneuver before large interest rate movements could become increasingly difficult in the autumn.
However, other investors interpreted the policy of the money-keepers quite differently: the US Federal Reserve deliberately wanted to provoke a small recession with its interest rate decision so that the economy cools down and prices also fall again. “It is quite possible that the central bank wants a recession because it would dampen prices,” says market strategist Frédéric Leroux from the Carmignac fund house. US Federal Reserve Chairman Jerome Powell tried to dismiss such accusations in the evening, saying the US economy is not in a recession, at least not at the moment.
Stock market investors react cynically
Much more important than the current July interest rate decision, however, is the course that Chief Banker Jerome Powell is setting for the coming months. Powell said at a press conference in the evening that the central bank could lower interest rates in the future. A rate hike of another 0.75 percentage points in September is not off the table, but “depends on the data”. In addition, the central bankers also referred to poorer economic and consumption data in their written statement.
Even if the poorer economic prospects are hardly any cause for celebration, stock market investors were already massively buying shares during Powell’s speech at the central bank. The traditional American index Dow Jones on the New York Stock Exchange has meanwhile jumped by a whopping four percent. “Hence, traders can put a tick on today’s interest rate session,” says market strategist Thomas Altmann of QC Partners.
Why investors took action despite the poor economic prospects can only be explained by reading coffee grounds. The undertone of the head of the central bank in his speech initially seemed more skeptical than expected to investors. Should the central bank be more hesitant in raising interest rates than previously expected, this could bring unexpected momentum for the stock markets. Because the lower the return on traditional interest investments, the more attractive equities appear in comparison.