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‘Real rates’ rise to 2009 levels in the US and point to positive in the euro

Date: February 28, 2024 Time: 18:02:31

The de-escalation of inflation and the historical series of interest rate hikes have caused a turnaround in the outlook for monetary policy with ‘real rates’ (discounting inflation) in positive territory in the US and about to continue on the same path. the Eurozone. In fact, despite the fact that the Federal Reserve (Fed) kept rates unchanged last Wednesday in the 5-5.25% range, the latest reading of downward inflation in the US (4%) has caused the differential to widen to the 1.17%, its highest level since the summer of 2009.

In this way, nominal interest rates adjusted for price growth on the other side of the Atlantic exceed the situation they experienced between December and January 2019, just after the last Fed rate hike cycle, also with Jerome Powell as o Governor , which plunged the economy into a state of stagnation and contraction that affected the attacks of then-President Donald Trump against the central bank and its main official.

On paper, the turn from negative to positive real interest rates changes the economic and market scenario. On the one hand, it encourages saving and investment because it increases the incentives to save instead of spending. It also coincides with a contraction of credit as both companies and households seek to reduce their indebtedness with higher rates. The negative side is that positive real rates discourage consumption and investment with financing.

The Fed considers this scenario of lower demand as an ally in its fight for inflation. The increase in rates discounting inflation is the largest recorded for the US economy since the 1980s, when Paul Volcker raised rates from 10% to 21% in the midst of a wave of inflation. As Powell recalled on Wednesday, the cumulative effect of rate hikes is still in the process of being fully passed through to the economy. It’s one of the reasons the Fed took a rate pause after ten consecutive hikes since 2022.

“Interest-sensitive spending is affected quickly, as is the case with housing, durable goods, but broader demand, spending, and the value of financial assets may take longer to respond. You can practically find research that please support any answer you want in that regard So there is no certainty or agreement in the profession on how long it takes [la transmisión completa de tipos]. That makes it challenging. So we are looking at the calendar and what is happening in the economy,” Powell said.

Real yields on listed US public debt in secondary markets are also jumping from negative to positive over more and more terms. In the short term, spreads above inflation are higher. The CPI report for May that was published on Tuesday lowered the bar for the headline rate to 4% and the subjacent rate -excluding energy and food- to 5.3%. The interest of the federal T-Bills (letters) from 3 to 12 months move between 5.2% and 5.3%, while the 2, 3 and 20-year bonds also exceed the 4% barrier. Close to that level (3.8%) is the 10-year debt, the benchmark for the Treasury led by Janet Yellen.

The wave that reaches Europe

The European case is different. The economic weakness, the delay in the upward cycle of interest rate rises and an even stickier inflation due to the energy crisis derived from the war in Ukraine keeps the economy still with negative real rates due to the CPI still growing in May above of 6% and the rates, from now on, are at 4%. The same does not happen in all the countries of the euro zone. Spain, for example, registered inflation of 3.2% in May. The 10-year debt is above (3.4%), as are the official ECB interest rates.

With the same effects on consumption and savings, the central bank also seeks greater financial stability in the permanent search to attract capital from the rest of the world. The euro/dollar, the reference currency pair, has appreciated this week after the ECB has shown itself willing to continue raising rates to close the differential that still separates it from the Fed. Right now it is around 120 basis points and will be further reduced in July if Lagarde’s promise is fulfilled and Powell opts to maintain the rate pause.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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