The Federal Reserve (Fed) continues its fight against inflation and raises the benchmark interest rate by another 75 basis points, to a range of 3.75%-4%
The US Federal Reserve (Fed) is again widening the gap separating its monetary policy from that of the European Central Bank (ECB), with much more aggressive moves over months in its fight against runaway inflation that ended at 8.2% in October. the country . The institution led by Jerome Powell has decided to raise interest rates by an additional 75 basis points to a range of 3.75%-4%.
This is the fourth consecutive rise of this magnitude and the sixth since the rate hike began in March. You even have to go back to the 1980s, with Paul Volcker at the helm of the Fed, to see such an aggressive move.
It is true that the body seems to have free rein to undertake these increases. Especially as the labor market continues to show signs of strength despite fears of a recession, with the creation of 239,000 private sector jobs in October, well above the 192,000 expected, according to the ADP survey released this Wednesday.
Precisely for this reason, it is likely that the agency will take a break to monitor the effects of its monetary policy on the economy. The market expects the rate hike to be ‘limited’ to 50 basis points at the next meeting in December. Something that would give some respite to an ECB that is way behind the Fed in its stimulus withdrawal process.
While the body chaired by Christine Lagarde has also accelerated the process in recent months – with another 75 basis point rate hike last week – the reality is that these hikes are taking place in a much more fragile economic environment. The risk of current monetary policy ending in a recession is thus much greater in Europe than in the US.
Despite this, Lagarde can’t stop climbing. The problem is that rate hikes across the Atlantic imply a stronger dollar against the euro. And a weak euro, after losing more than 20% against the dollar this year, is inflationary for the region, as everything we buy abroad – especially energy materials – is more expensive for us. To protect the single currency, the ECB will therefore have to follow the example of the Fed closely.
This perspective is already having a direct impact on the financing costs of businesses and individuals. This is especially visible in the prices of mortgages, which have become considerably more expensive in the heat of the rise in the Euribor.
The indicator, which usually anticipates central bank movements, has risen at the fastest pace in its history this year, with October averaging 2.629%, the highest level since December 2008, when it stood at 3.452%. A year earlier, it moved at -0.477%, which will lead to a sharp rise in the prices of floating rate mortgages in Spain, which are reviewed annually. For example, with an average 30-year mortgage of 150,000 euros, with a difference of 0.99% plus Euribor, the fee increases by about 230 euros per month.
And the situation could be even worse. Taking the US market as a reference, interest rates on mortgages have skyrocketed, making market entry practically unaffordable for most households. According to data from Freddie Mac, one of the leading mortgage buyers in the country, the average interest rate on 30-year loans at some banks has already crossed the 7% threshold. A year ago, that percentage fluctuated around 3%.
Situations like this have doubled hopes that the Fed will consider letting go of the accelerator pedal to assess the impact of its monetary policy on inflation and the real economy. “It seems likely that the pace of rate hikes will slow down almost across the board from now on,” said Alexis Bienvenu, fund manager at French firm La Financière de l’Echiquier.
Of course, that doesn’t mean the drops are close. Only the upload speed could be lower from now on. In fact, the outlook indicates that the peak will be reached in 2023 with an interest rate of 5%.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
