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On Wednesday evening, the US central bank (Fed) presented the minutes from the previous interest rate meeting, when interest rates were raised by 0.25 percentage points to a range of 5.25-5.5 per cent – the highest level in 22 years.
The report shows that most of the members were concerned that the inflation battle is far from over and that there may be a need for further tightening.
In July, inflation was 3.2 per cent compared to the same month the previous year, while core inflation was unchanged at 4.7 per cent. The central bank has a long-term target of two percent.
“With inflation still well above the committee’s long-term target, and a labor market that remains tight, most participants still saw significant upside risks to inflation, which could require further tightening of monetary policy,” it said.
On the other hand, there were also several who argued that one should be careful and rather look at the effects of previous interest rate increases. The interest rate has been raised from zero to 5.5 per cent in less than a year and a half, an exceptionally fast increase.
– On guard
– The immediate impression is that this is hawkish, says Handelsbanken’s chief economist Marius Gonsholt Hov about the report. Hawkish means that a tighter monetary policy is advocated.
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Hov notes that the interest rate meeting took place before the inflation figures for July, which showed a slowdown in core inflation. On the other hand, the figures for the real economy have been strong overall.
He refers, among other things, to the Atlanta Fed’s GDPNow, which measures economic growth in real time. For the third quarter, this estimates an annualized growth of 5.8 per cent.
– This may in turn contribute to prolonging the period of high inflation. The Fed is probably very wary of core inflation getting a “round two” rise, even though the downward trend has been clear in the latest figures.
Marius Gonsholt Hov, chief economist at Handelsbanken. (Photo: Fartein Rudjord) More…
The market still rates a certain probability that the interest rate will be raised once more. According to the CME Group, there is over a 35 percent probability that the interest rate will be raised in November, if it is not raised at the September meeting, which there is a 12 percent probability of.
Hov notes that market interest rates did not change much after the report. Now he is setting his sights on the central bank’s annual Jackson Hole conference, which takes place next week.
– A lot will revolve around the signals around how long the high level of interest rates must last in order for inflation to be brought under control on a more permanent basis, says Hov.
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The leading stock market indices opened the trading day slightly down on Wednesday. Towards the end of the trading day, the fall intensified:
The Dow Jones Industrial Average, which is made up of 30 hand-picked supposedly important stocks, fell 0.5 percent The Nasdaq Composite, which is dominated by technology companies, fell 1.1 percent The composite S&P 500 index, which is made up of 500 of the largest listed companies, fell 0.7 percent
In August, the Nasdaq index fell by around six per cent, but it is still up 30 per cent since the turn of the year.
Summers warns
The interest rate on US government bonds with a ten-year maturity rose to 4.27 percent on Wednesday, not far from the peak from October 2022. The ten-year interest rate is often referred to as the world’s most important interest rate, because it has a large effect on other interest rates and financial figures worldwide.
On Wednesday afternoon, Larry Summers, economics professor and former finance minister, warned that the ten-year interest rate could well rise even higher.
– I do not see the current level of long-term interest rates as some kind of peak, says Summerswho points to large deficits in the state budget and that he expects higher inflation than in the past, Summers told Bloomberg.
On average, the ten-year interest rate has been 2.9 per cent over the previous two decades, according to Bloomberg. Summers envisages that the ten-year interest rate could average 4.75 per cent over the next decade – perhaps even more.
– I would assume that these higher long-term interest rates are here to stay – and if I had to bet, I think I would bet that it is more likely that they will go up than that they will go down, says Summers.
Warns of expensive stocks
Increased long-term interest rates are particularly negative for companies that are not making money now, but are priced high because high future earnings are expected. Investors are constantly counting on the present value of future income, and these become lower when long-term interest rates rise.
The ten-year real interest rate, which is the ten-year interest rate minus expected annual inflation, has risen from minus one per cent to 1.9 per cent in just two years. The interest rate is now at its highest since the financial crisis 15 years ago.
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This year, the American stock market has nevertheless risen by around 17 per cent, and it is the large technology companies that have carried almost the entire load. Several are now warning that the euphoria associated with artificial intelligence has created bubble-like conditions, where Nvidia and Tesla are cited as examples.
Investor Peter Warren is among those who believe that you are not paid well enough for the risk involved in equity investments. He points out that virtually risk-free interest-bearing securities, such as US government bonds, now offer attractive interest rates.
– This is the dream situation for anyone who wants secure income. Now you can buy safe bonds and lock in a return that you could only dream of a short time ago. More and more analysts are now talking about the current share price not being sustainable, Warren told DN on Tuesday. (Terms) Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links, which lead directly to our pages. Copying or other forms of use of all or part of the content may only take place with written permission or as permitted by law. For further terms see here.
2023-08-16 19:07:30
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