The US Federal Reserve raises interest rates by 0.5 percentage points! The last time that happened, the United States slipped into a recession. Meanwhile, cryptocurrencies are pumping.
Fed Chairman Jerome Powell was able to announce the long-awaited decision yesterday. The US Federal Reserve raises interest rates by 0.5 percentage points to between 0.75 and 1 percentage point. Surprisingly, the markets react positively to the rise in the key policy rate – equities and cryptocurrencies rise.
“My colleagues and I recognize that high inflation hits those with economic worries the hardest.”
At its March 2022 meeting, central banks already announced an increase in the key interest rate to 0.25 percentage points. When it became clear at the time that inflation was heading for record levels, the possibility of further increases was also recognized. Due to the huge cash flow in Corona times, an oversupply of money can be observed worldwide, which is now seeping into the economy. With an inflation rate of 8.5% last month, this is the highest rate since 1982!
“The US economy is in good shape and ready for a rate hike.”
Fighting inflation is the Fed’s top priority, even though US GDP had just fallen 1.4 percent in the first quarter of 22. It all becomes worrying when US unemployment statistics are taken into account: According to forecasts, it should be estimated at 3.5% and thus trigger further inflation. It is a big task for the Fed to gently dampen the US economy. On the one hand, unemployment and excessive money supply are fueling inflation, on the other hand, GDP fell in the first quarter. Although declining GDP may be a sign of a coming recession, Powell justifies the decision with other measures:
“Consumer spending and investment remain high.”
In any case, if we compare it with previous events, we can understand why Deutsche Bank predicts a recession in 2023. The last increase of 0.5 to 6.5% took place in 2000, but was stopped due to the ongoing recession. Powell ruled out an increase of more than 0.5 points at least for the next session.
Crypto, NASDAQ and S&P 500 rally on interest rate decision
Powell’s warnings that he would raise the key interest rate on an ongoing basis are likely received by investors. The S&P 500, NASDAQ and crypto already rose a lot in anticipation of the decision: Bitcoin, for example, could rise by 5% within 24 hours. An increase in interest rates leads to lower demand for credit, which usually has a negative impact on risky investments such as tech stocks or cryptocurrencies.
However, the reason for the positive reaction may also be the mitigated plan to sell US government bonds. As part of what are known as “quantitative easing,” the Fed massively expanded its balance sheet with U.S. government bonds. The purpose of such a measure is to stimulate the market. These government bonds are now floating back on the market – but not in the amount initially thought.
In light of the ongoing interest rate hikes, it seems surprising why the ECB is passively keeping an eye on Europe. Inflation in the euro area is also at a record high of 7.5% in April. Despite all this, the key policy rate will not move from 0%. How long will it continue, asks the responsible citizen, whose wallet is being ripped further?
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