empty
19.09.2022 11:18 PM
The biggest gamble of the central bank of the US, Europe and Britain

The Federal Reserve and its peers around the world, late in anticipating the worst inflation in four decades and then slow to crack down on it, now make no secret of their determination to win the fight against rising prices - even at the cost of slowing or reducing the growth of their economies.

This image is no longer relevant

About 90 central banks have raised interest rates this year, and half of them have risen at least 75 basis points at a time. Many have done this more than once that the chief economist at Bank of America Corp. Ethan Harris calls it "a competition to see who can raise the stakes faster."

The result was the most massive monetary tightening in 15 years, a drastic departure from the era of cheap money that was ushered in by the 2008 financial crisis, which many economists and investors have come to view as the new normal. According to JPMorgan Chase & Co., in the current quarter, the largest central banks will raise rates since 1980, and things will not stop there.

This week alone, the Fed is set to raise its key rate by 75 basis points for the third time, with some calling for a full percentage point after US inflation topped 8% again in August. The Bank of England is forecast to raise its benchmark by 50 basis points, with rate hikes expected in Indonesia, Norway, the Philippines, Sweden and Switzerland, among others.

This image is no longer relevant

Putting on the brakes, politicians are beginning to speak grimly, publicly acknowledging that the higher they raise rates to keep inflation in check, the greater the risk that they will hurt economic growth and employment.

Fed Chairman Jerome Powell said last month that his campaign to contain prices "would bring some pain to households and businesses."

European Central Bank Executive Board member Isabelle Schnabel talks about the "sacrifice ratio," jargon for the loss of production it would take to control inflation. The BoE goes so far as to predict that the recession in the UK will begin by the end of this year and could last until 2024.

There is no doubt that monetary medicine will hurt. The question is - how much? Analysts at BlackRock Inc. believe that returning inflation to the Fed's 2% target would mean a deep recession and another 3 million unemployed, while reaching the ECB's target would require even more cuts.

Uncertainty is exacerbated by the delay before the rate hike impacts the economy, in addition to the structure of today's inflation, much of which is due to energy and other supply shocks that central banks cannot control.

Higher-than-expected US inflation data for August last week sent the stock market into its sharpest drop in more than two years, driven by bets on the Fed's tightening policy. Billionaire hedge fund manager Ray Dalio sees the prospect of more than 20% drops in stock markets as rates continue to rise.

This image is no longer relevant

Central banks would prefer their economies to keep chugging along. At some point, they may abandon their aggressive policies to try to ensure this. But now their main goal is to avoid repeating the mistake of the 1970s, when their predecessors prematurely weakened lending in response to the economic slowdown, without first taking inflation under control.

This concern is an argument in favor of moving forward decisively with a rate hike, because if inflation is allowed to rise, it can lead to increased economic problems in the long run.

Anna Wong, chief economist at Bloomberg Economics for the United States, believes that the Fed will eventually have to lower the base rate to 5%, doubling today's level - a dose of further tightening that could cost the economy 3.5 million jobs and deal additional blows to already affected markets.

Powell spent much of 2021 describing the inflation shock as "temporary," and he and his colleagues entered this year predicting that interest rates would need to rise by just 75 basis points in 2022. The Fed has already raised the rate three times more.

Last November, ECB President Christine Lagarde said that a rate hike in the eurozone in 2022 is unlikely, but this month she raised them by 75 basis points and is considering a repeat in October.

This action puts a lot at stake in the fight against inflation.

"Trust is everything for central banks, and it has been undermined by a misunderstanding of temporary inflation," says Rob Subbaraman, chief economist at Nomura Holdings Inc. "Restoring trust in them is their top priority, even if it means dragging out the recession - that's the lesson of the 1970s."

Time lag

In a sign that investors are anticipating a recession in the US, yields on short-term US Treasury securities have risen above their long-term equivalents in most cases this century, with some bond traders betting that the Fed will have to ease policy in the later stages of 2023. Meanwhile, the S&P 500 is approaching its sharpest annual negative since 2008.

One of the reasons for this concern is that monetary policy is working with a lag. First it weakens financial markets, then the economy, and finally inflation. Thus, a repeated increase in rates becomes dangerous.

"It takes time to reduce inflation," says Harris of BofA. "If you start talking about focusing only on current inflation as the main indicator, you will be too late to stop the tightening cycle." Harris believes that the UK and the eurozone will fall into recession in the fourth quarter, as rising energy prices will negatively affect the economy this winter, and he expects a recession in the US next year.

The U.S. economy - and especially the labor market - has been surprisingly resilient so far. But economists say that just means the Fed will have to put in a lot more effort to cool demand.

"Inflation and the labor market have proved more resilient to higher rates than the Fed expected," says former Fed Vice Chairman Donald Cohn, "so they need to raise rates even more now."

Until recently, it seemed to central banks that it would not be difficult to tighten policy. Inflation was sky-high, labor markets were strong, and interest rates were at their lowest.

But the compromises are becoming tougher as high rates begin to take their toll on economies that are already suffering from the effects of a protracted pandemic and the conflict between Russia and Ukraine.

The cost of borrowing in many economies, including the United States, is turning from stimulating to restrictive. A rising dollar is hurting emerging markets with debt. A sharp reduction in Russian natural gas supplies increases the risk of stagflation in Europe, as prices rise amid an impending recession.

Andrey Shevchenko,
Chuyên gia phân tích của InstaForex
© 2007-2025
Summary
Urgency
Analytic
Andrey Shevchenko
Start trade
Kiếm lợi nhuận từ những biến đổi giá của tiền điện tử với InstaForex.
Tải MetaTrader 4 và mở giao dịch đầu tiên của bạn.
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    THAM GIA CUỘC THI

Các bài báo được đề xuất

AUD/JPY. Phân Tích và Dự Báo

Hôm nay, vào thứ Ba, trong phiên giao dịch châu Âu, cặp tiền AUD/JPY đã chạm mức tròn 97.00. Đồng yên tiếp tục cho thấy sự yếu kém tương

Irina Yanina 12:44 2025-07-15 UTC+2

EUR/USD. Phân Tích và Dự Báo

Cặp tiền tệ EUR/USD đã phục hồi từ mức thấp trong nhiều tuần qua do lo ngại về các mối đe dọa áp thuế từ Tổng thống Mỹ Donald Trump

Irina Yanina 12:30 2025-07-15 UTC+2

Liên minh Châu Âu Hoàn Thiện Danh Sách Biện Pháp Đối Kháng Thứ Hai

Liên minh Châu Âu đã hoàn tất danh sách các biện pháp đối phó thứ hai đối với hàng hóa của Hoa Kỳ, tổng

Jakub Novak 11:25 2025-07-15 UTC+2

Những Hành Động của Trump Làm Đức Báo Động

Trong khi đồng euro vẫn tương đối ổn định, Thủ tướng Đức Friedrich Merz lại không cảm thấy tự tin như vậy. Trong một cuộc phỏng

Jakub Novak 11:11 2025-07-15 UTC+2

Lạm phát gia tăng ở Mỹ sẽ giảm khả năng cắt giảm lãi suất của Fed (Khả năng phục hồi của USD/CAD và sự tăng trưởng của Bitcoin)

Trong khi Tổng thống Donald Trump tiếp tục chơi trò chơi yêu thích của mình được gọi là "Làm cho nước Mỹ vĩ đại trở lại,"

Pati Gani 09:58 2025-07-15 UTC+2

Thị Trường Sẽ Phá Vỡ Xiềng Xích

Sâu thẳm bên trong, các thị trường vẫn tin rằng thuế quan có thể trở thành một lực lượng gây lạm phát. Tuy nhiên, không có xác nhận

Marek Petkovich 09:14 2025-07-15 UTC+2

Cần Chú Ý Gì Vào Ngày 15 Tháng 7? Phân Tích Các Sự Kiện Cơ Bản Dành Cho Người Mới Bắt Đầu

Vào thứ Ba, nhiều báo cáo kinh tế vĩ mô sẽ được lên kế hoạch công bố. Báo cáo quan trọng nhất trong ngày là Chỉ số Giá Tiêu dùng

Paolo Greco 07:27 2025-07-15 UTC+2

Tổng quan GBP/USD – Ngày 15 tháng 7: Ngân sách Hoa Kỳ chuyển sang thặng dư — Điều gì tiếp theo?

Cặp tiền tệ GBP/USD tiếp tục giao dịch giảm vào thứ Hai, mặc dù không có lý do cơ bản mạnh mẽ nào để giải thích cho sự dịch chuyển

Paolo Greco 03:58 2025-07-15 UTC+2

Tổng quan về EUR/USD – Ngày 15 tháng 7: Chưa Ký Kết Thỏa Thuận với EU. Mexico Bị Kéo Vào Cuộc Xung Đột

Cặp tiền tệ EUR/USD giao dịch rất yên ả suốt cả ngày thứ Hai, khi thị trường tiếp tục không để ý đến việc Trump tăng thuế quan. Nếu đồng

Paolo Greco 03:58 2025-07-15 UTC+2

Ngân Sách Hiện Đang Thặng Dư, Nhưng Nợ Công Không Giảm

Vào thứ Sáu vừa rồi, Bộ Tài chính Hoa Kỳ đã công bố thặng dư ngân sách đầu tiên kể từ năm 2017. Nhiều người trên thị trường

Chin Zhao 00:48 2025-07-15 UTC+2
Không thể nói chuyện ngay bây giờ?
Đặt câu hỏi của bạn trong phần trò chuyện.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.