The Fed and the ECB will raise rates: what message will they send with their decisions

The two most important central banks in the world, the United States Federal Reserve (Fed) and the European Central Bank (ECB), will announce new increases in interest rates, after the current high global inflation figures.

(See: The forecasts on what the Fed rate hike would be).

The Monetary Committee of the Fed will evaluate between Tuesday, January 31 and Wednesday, February 1, a new rate hike, which the market expects to be of a lesser magnitude than the previous ones due to the moderation of inflation and the weakening of the real estate market.

Inflation reached a 40-year high in the US in 2022. The Fed applies a policy of sustained interest rate increases to increase the cost of credit and thus contain consumption and investment, which push prices up.

Due to this systematic policy, the real estate market and retail sales show signs of weakness, and the increase in salaries began to moderate, all parameters taken into account by the Fed whose current evolution suggests a lower rate increase than the last ones adopted. by the organism.

(See: Is an economic recession approaching? This is what the Bank of the Republic says).

“A slower rate of hikes will give the committee time to assess the full economic effects of monetary tightening so far.”, said Madhavi Bokil, a senior vice president at Moody’s Investors Service.

Markets expect the Fed to adopt an increase of 25 basis points in its rates which would mean a reduced increase for the second time in a row. The Fed’s benchmark rate would be between 4.50% and 4.75%, a level last recorded in 2007.

For its part, the ECB points to new increases to deal with inflation in the euro zone that is high. After years of cheap money, the institution applies from mid-2022 a policy of high rates to cool economic activity and stop the escalation of prices caused by the war in Ukraine.

(See: ‘The hard and mature’ are coming: this is how you can face high rates).

Return to relative calm in energy markets allowed inflation to drop in December for the second consecutive month to 9.2%, although it remained well above the 2% target.

This new rise will place the interest rate that remunerates undistributed bank liquidity in the form of credit up to 2.5% and the rate of short-term refinancing operations to 3.0%, the highest percentage since November 2008.

American economist and Nobel laureate Paul Krugman He said markets are too sure inflation is over and financial conditions could ignite it again.

(See: US and 11 other countries, for new investment environment).

“I’m a little worried that the markets are getting ahead of themselves.”, Krugman said this Monday, January 30. “The markets are assessing that inflation is over. That could be like denying yourself”, he assured.

There are increasing signs that the Federal Reserve is successfully reining in the further price growth in a generation, with inflation falling across a number of indicators in December.

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