US central bankers face a dilemma – the economy

There is probably no place where you can measure the sensitivity of Americans as in the parking lot of the retail giant Walmart. Even from space, satellites watch buyers throw everything from apples to pipe wrenches into their cars. Milk has become 16 percent more expensive in the US, and egg prices have risen by as much as 33 percent. Earlier this week, the company reaffirmed what Wall Street bankers had long suspected: instead of clothes and TVs, many Americans only buy what they need. The stock market alert from retail giant Walmart has become a warning to the entire US economy.

The situation in the Walmart parking lot is now also a topic for US central bankers, who will convene a regular interest rate meeting on Wednesday night after the issue’s editorial date. The word “rotating” is a rather euphemistic term for a stark central bank rate. Observers expect the monetary authorities to raise the key interest rate by another 0.75 percentage points in the evening. “They are determined to fight inflation,” says US expert Christian Scherrmann of DWS, a subsidiary of Deutsche Bank. A total rate hike of 2.25 percentage points in just five months? After all, this has not happened since the 1980s.

If you want to understand the reason behind this drastic monetary policy, all you need to do is look at the American wallets. The same coins are still ringing in the compartment, but you can buy less and less. Inflation in the United States rose to 9.1% in June. Supply chain problems, high energy prices, and generous wage increases are pushing up prices between Alabama and Wyoming. “Inflation is now the Fed’s most important enemy,” says Carmignac fund Frédéric Leroux.

Americans don’t spend that much money anymore

Already in June, the US Federal Reserve raised its main interest rate by as much as 0.75 percentage points to a range of 1.5 to 1.75 percent. The logic behind these abstract numbers: Higher key interest rates make loans more expensive, and US individuals don’t spend as much money anymore. In order to be able to sell their products further, firms must lower their prices, at least according to the handbook, inflation would fall. Central bankers have already achieved one thing with the sharp shift in interest rates: many Americans expect annual inflation to be just 2.8 percent over the next five years.

But any interest rate hike by the central bank has side effects as well: while higher interest rates are intended to contain inflation, they can also dangerously slow the economy down. When interest rates rise, companies also have to pay more for loans, for example. Early indicators of weaker US growth are already emerging. Some even fear that the country may soon officially fall into recession. That is why central bankers consider arranging a so-called “soft landing” to be the highest discipline.

However, it seems unlikely that central banks will be pushed off course by just a few leading indicators. “You can even imagine that the central bank actually wants a recession as that would ease the price pressure,” says Fondsmann Leroux.

Many pundits are also speculating about some kind of last-minute panic among the money keepers: if they don’t raise interest rates significantly now, key economic data could be overshadowed by another interest rate decision, leaving central bankers a choice but to act more cautiously. Therefore, many experts assume that the money watchdogs on Wednesday evening will act tactically and will significantly raise interest rates again by 0.75 percentage points. – before it can get harder in the fall.

The rate set by the chief central banker Jerome Powell for the coming months will probably be much more important than the current July decision on interest rates. Experts will therefore probably search the statements of central banks for small clues, whether they are still just adjusting their policy to inflation (and counteracting it quite sharply accordingly), or whether the first economic indicators now also give rise to concern (and a slightly more moderate approach can be expected from September).

In particular, the whole tea leaf reading is likely to revolve around the question of whether the US Federal Reserve will raise interest rates again very significantly by 0.75 percentage points in September – or will slow down to just 0.5 percentage points.

It is also a key question for investors on international stock exchanges, who have already fully taken into account the current decision on interest rates in their expectations. “Therefore, the prospects of central banks for stock exchanges will be much more important than the decision on interest rates itself,” says market expert Thomas Altmann of QC Partners.

An important meeting of the US Federal Reserve may cause significant price fluctuations in the stock market. In the summer, many large investors are on vacation and therefore are less active on the stock exchange, and market experts have been observing a noticeably low activity on important stock exchanges for several days. In this mixed situation, even a reasonable sum of money can cause serious antics. Chief central banker Powell has to put every word on the line even more.

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