There is also growing pressure from high interest rates on government budgets, which are spending huge sums trying to protect businesses and households from rising prices. Some politicians are already openly criticizing the actions of central banks. In heavily indebted Italy, whose interest rates on public debt have risen nearly fourfold in the past year, several ministers have described the ECB’s decisions as “madness”. In more moderate terms, other European politicians have also accused central bankers of burdening citizens with high interest rates at a time of rising prices. However, according to economic logic, the cure for inflation is to suppress demand by limiting the availability of financial resources.
All of these lingering consequences of past hikes will make it harder for central banks to continue with the hike and successfully present it to the public. So, with their current strong tone, they are trying to buy some room for further tightening before that window closes.
Small steps up
For now, the only safe prediction seems to be that rates will continue their upward march in the near term, albeit with smaller increases. According to the latest indications from the Fed, the key interest rate of the US central bank will exceed 5% this year. The uncertainty in the forecasts, however, speaks to how quickly they’re changing: Just a year ago, Fed officials expected the gauge to stay below 2% in 2023.
Markets are now questioning the Fed’s demands as economic woes could lead to a U-turn. Investors’ top bets in late December suggest that the US central bank’s interest rate won’t go above 5%, as bank officials predict, and will even start declining even before the end of 2023. The market doesn’t believe the claims as a Fed hawk, Tiffany Wilding, an economist at investment firm Pimco, told the Financial Times. This is helped by the fact that Powell did not explicitly rule out the idea of the Fed further delaying interest rate hikes at its next meeting.
