Don’t fight the Fed
In the investment world, the veteran guys often say it’s not smart to fight the Federal Reserve. By this they mean that it is not intelligent to expect price increases if the Federal Reserve indicates that it still wants to raise interest rates sharply. Now it even stands shoulder to shoulder with the European Central Bank in its fight against inflation. As a result, the two largest central banks in the world raise interest rates.
That is the ideal recipe for a lot of misery in the financial markets. Last week we saw the effect of the interest rate hikes of both institutions. A sea of red followed, especially after the press conferences of Chairs Jerome Powell (Fed) and Christine Lagarde (ECB). During their speeches they gave very clear signals that the interest rate hikes are not over yet and that the battle with inflation is anything but won.
When will the rate change come?
Now the market has been speculating for months on a so-called course change (or pivot) of the Federal Reserve. As a central bank, they were the first in the world to start raising interest rates, so everyone expects that they will also be the first to finish inflation. However, Powell indicated during last week’s press conference that we should not count on interest rate cuts in 2023.
However, that does not alter the fact that there is increasing fear of a recession in the United States. On Friday, the country had to present the weakest PMI numbers in two years. PMI stands for Purchasing Manager Index and is a survey of some purchasing managers of major companies in the United States. Those weren’t the only numbers that were somewhat worrying for the country.
The danger is that the Federal Reserve and the European Central Bank will continue to raise interest rates in an economy that is gradually squeaking and creaking. So we are currently dealing with a lot of tough talk from the central bankers, but we have yet to see how they act when a recession actually breaks out.