On September 8, local time, the European Central Bank held a meeting and decided to raise interest rates by 75 basis points to cope with high inflation. Meanwhile, Fed Chairman Jerome Powell attended the Cato Institute's Monetary Seminar to reaffirm the Fed's commitment to fighting inflation.
After the ECB announced the interest rate decision, the three major European indexes fell together, but then pulled up. As of the close of the day, the UK FTSE 100 was up 24.23 points, or 0.34%, the French CAC40 was up 19.98 points, or 0.33%, and the German DAX30 was down 11.65 points, or 0.09%.
LAGARDE: A 75 basis point hike is not the norm
Since the introduction of the euro in 1999, the European Central Bank has generally raised interest rates by only 25 basis points, so the European media called the rate hike "unprecedented" in recent years.
The ECB has kept interest rates in negative territory since 2014 to stimulate spending and hit low inflation. At its interest rate conference in July, the ECB raised the main refinancing rate, marginal lending rate and deposit facility rate to 0.50%, 0.75% and 0.00% respectively. This is the first rate hike in the eurozone in 11 years. This is the second rate hike.
ECB President Christine Lagarde said that a 75 basis point rate hike is not the norm, the ECB is moving towards a neutral interest rate, and the deviation from the target level proves that it is reasonable to raise interest rates in advance.
She also said the economy still faces downside risks and weak global demand is dragging down economic growth. Energy prices remain the main source of inflation, with a weaker euro exacerbating inflation levels.
Previously, the ECB had predicted that it would not raise interest rates this year, but now that the surge in energy prices has helped eurozone inflation reach an all-time high of 9.1%, well above the central bank's healthy long-term inflation target of 2%, the ECB has to change its pace.
The ECB has also raised its inflation forecast, forecasting an average eurozone inflation rate of 8.1 percent in 2022, 5.5 percent in 2023 and 2.3 percent in 2024.
Raising interest rates is a classic antidote to rising inflation for central banks, which will make borrowing, consumption and investment more expensive, thereby dampening demand for commodities across the market.
Isabelle Schnabel, a senior ECB official, said last month that "determination" is more important than "caution," which could allow inflation to influence expectations of prices and wages.
Maintaining price stability is an important task under the EU treaties. Holger Schmitten, chief economist at Berenberg Bank's London office, said that while the ECB's actions would "cause short-term pain to families, workers and companies," it must be done or the future costs would be more expensive.
But the problem is that inflation in the eurozone is currently not coming from the demand side, but from the supply side of the economy: the cost of oil and gas, which the ECB cannot do anything about.
As Russia restricted gas supply, the price of natural gas used for power generation, heating and plant operations in Europe rose more than 10-fold.
Many analysts say a eurozone recession is almost inevitable in the coming months as consumer spending capacity is squeezed and businesses struggle to pass on higher economic costs, with a recession expected by the end of the year and 2023.
Analysts also said any rise in the euro would not be sustainable given the prospect of interest rate hikes from the Fed, the Bank of England and other central banks, rising euro zone debt costs, a potential recession, the upcoming Italian election and geopolitical risks.
Lagarde said the ECB would raise interest rates again at its next rate meeting, and how much would depend on the data.
The ECB's series of moves suggest that it is willing to sacrifice so-called growth to cope with these pressures.
Powell: Attitude continues to "eagle"
On September 7, local time, the Federal Reserve released the Beige Book. Beige Book argues that U.S. economic activity has remained unchanged overall since early July, but future economic growth prospects remain generally weak, with prices still high across the country, with most respondents expecting price pressure to continue at least until the end of the year. The report said economic growth was slowing and wage expectations were falling.
The content of the Beige Book is good news for market participants, because the Beige Book shows a weak economic outlook, further confirming the news that the US economy is in recession, the market expects the Fed to slow down the pace of interest rate hikes, after the release of the Beige Book on the 7th, the US stock market rose in unison, but this trend was quickly reversed after Powell's speech.
On September 8, almost at the same time as the ECB's statement, Powell attended and spoke at the Cato Institute's Monetary Seminar.
From September 20 to 21, the Fed will hold a meeting, when the Fed will be released in details of the Fed's interest rate hikes, this is also powell's last appearance before the 20th meeting, which also makes his speech more eye-catching, and the outside world hopes to find clues about the magnitude of the interest rate hike from his conversation.
Powell reiterated the Fed's commitment to fighting inflation, "Past history has warned us not to ease policy too soon. I can assure you that my colleagues and I will be firmly committed to fighting inflation."
During the normal trading hours on Wednesday (September 7) local time, the US stock market experienced a strong rebound due to the impact of Beige Book. The Dow Jones Industrial Average rose about 1.4 percent, the S&P 500 rose 1.8 percent and the Nasdaq Composite rose 2.1 percent. But after Powell's speech, U.S. stocks fell in response. The Dow fell 0.72 percent, the S&P 500 lost 0.77 percent, and the Nasdaq Composite fell 0.92 percent.
Even the short rally on the 7th is only a small wave in the overall downward trend of the recent US stock market. If the Fed's "hawkish" attitude does not change every day, it will be difficult for the US stock market to recover.
Nela Richardson, ADP's chief economist, stressed that the search for higher interest rates is a foregone conclusion, regardless of what Decision Fed officials make later this month.
Susan Collins, president of the Federal Reserve Bank of Boston, recently said that the Fed's first goal is to bring inflation back to 2%. As Fed Vice Chairman Lyle Brainard has argued, tight monetary policy will continue because the sole purpose is to reduce inflation.
The two statements were consistent with Powell's statement some time ago at the annual meeting of the world's central banks in Jackson Hole, when Powell said that the Fed would work to raise interest rates to pull inflation back from its 40-year high.
The prospect of a rate hike is set, and the only concern for investors and the market scene has become whether the Fed will raise rates by 75 basis points or 50 basis points.
According to THE US media CNBC, the probability of the Fed raising interest rates by another 75 basis points at this month's meeting is 79%.
Investors in CME's futures market expect the Probability that the Fed will raise interest rates by another 75 basis points this month is about 75%. A 75 basis point hike would raise the federal funds rate to 3.0% to 3.25%.
This article originated from the International Finance News