The Federal Reserve of the United States (FED) will meet on Tuesday and Wednesday in Washington, with the aim of raising its reference interest rate by 100 basis points, to try to put a strong brake on the rate of inflation that has skyrocketed above 9% in the North country.
Last week, the European Central Bank increased the rate by 50 basis points, the first rise in 11 years, above the initial forecast that saw a rise of 25 basis points.
The FED has already adjusted the interest rate three times this year and was unable to neutralize the rise in prices, driven by the rise in the price of energy and food.
While most operators are in favor of an adjustment of 75 basis points, the large investment banks estimate that the FED will go for 100 basis points, to give a strong signal that it seeks to control the rise in prices in a frontal manner.even when this affects market liquidity and banks’ lending capacity.
At the same time, the monetary institution, in principle, would continue with the return of the titles that it had to rescue from the banks when it had to assist the financial entities at the start of the pandemic.
The FED program establishes that it will return to the banks the public securities in its portfolio for some 35,000 million dollars per month and will repay mortgages for some 17,500 million dollars per month, in an attempt to put its balance sheet in order, which shows a red about 9 billion dollars.
What market players say
For the economist Mohamed El-Erian, president of the Gramercy investment fund and adviser to the Allianz group, the most worrying thing will be “the lack of liquidity, which constitutes a great risk for the markets. We are starting to see the markets run out of funding. Issuance in June was very low and companies have run out of funding,” he told Bloomberg.
El-Erian affirmed that “the FED will intensify its program of raising rates, which will increase the possibility of a recession and it will make it difficult for companies to access more financing”.
The CEO of JPMorgan, Jamie Dimon, warned that “the risks of the United States entering a recession are” closer than they were before. The fate of the economy will largely depend on how quickly the Fed raises interest rates, which eat into corporate income, to combat rising inflation.”
Dimon noted that “inflation is close to peaking and then prices could start to fall, but it is difficult to make forecasts. In recent years, the largest monetary and fiscal stimuli the world has seen in its history have been injected. It is complex to guess the short-term consequences of these policies. What does seem to be clearer is that inflation is not transitory. Wages are going up and house prices too.”
The executive explained that “I have always thought that the zero interest rate policy was a bad idea. It has many harmful effects. On the other hand, the purchase of public debt has clear inflationary effects, much more than a simple quantitative easing program” .
The governor of the Fed, Christopher Waller, said days ago that he would approve “a increase in the short-term interest rate by one percentage point, if the next economic data shows a solid increase in consumer spending.”
The last time the Fed raised its rate by one point was in 1981.
At a conference in Idaho, Waller said he supports a 75 basis point increase but if it shows there are signs of rising consumer spending, I’d lean toward a bigger increase” in the rate.
The president of the FED, Jerome Powell, in his last hearing on Capitol Hill, did not rule out a rise of 100 basic points.
Asked by a member of the Senate Banking Committee if the Fed could raise rates by as much as 100 basis points in a single meeting, Powell said he would never take anything off the table and that the authorities will take whatever steps are necessary to “restore the price stability”, while warning that there may be “other surprises”.
