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Fed members are spooking markets with new anti-inflation statements – the true extent of the inflation problem is becoming ever clearer

The consensus that inflation has become a serious problem was not born yesterday. New statements from two key members of the US Federal Reserve show how seriously the Federal Reserve is taking the matter – and this is causing the markets to be uneasy again.

Fed Governor Lael Brainard and San Francisco Fed Chair Mary Daly both made comments showing that they both plan to raise interest rates and aggressively run down central bank assets on their balance sheets.

“It’s paramount to bring inflation down,” Brainard said during a Fed webinar in Minneapolis. The Federal Open Market Committee, which sets interest rates, “will continue to methodically tighten monetary policy, conducting a series of rate hikes and beginning to reduce the balance sheet at a rapid pace as early as our May meeting,” the official said.

Mary Daly also said inflation, now at a 40-year high, is as damaging as not having a job. “Most Americans, most people, most businesses, you all have faith that we won’t let this go forever,” Daly said. She repeatedly assured those in attendance that interest rates would rise, but added that she didn’t think it would lead to a recession.

The reduction in the balance sheet “will help tighten monetary policy beyond the expected rate hikes,” Brainard added. “Currently, inflation is far too high and carries upside risks. The Committee stands ready to take stronger action when inflation indicators and inflation expectations suggest such action is warranted,” she added.

Statements by Fed members add fuel to the fire

The markets did not go down well with these statements as investors fear a recession as a likely scenario, despite protestations from Fed members. With a recent minus of 2.7 percent, the Dax is heading for the round mark of 14,000 points at 14,038 points, below which it was last in mid-March. The EuroStoxx 50, the leading index in the euro zone, fell even more sharply in the afternoon, down 3.1 percent to 3795 points. In New York, there were also clear losses at the start of the stock market, especially in the technology sector, which has recently recovered somewhat.

“Economic development is increasingly pointing to an impending recession and market participants are increasingly starting to price this scenario into share prices,” said market expert Andreas Lipkow from the Comdirect. Not only is the economy in Europe sluggish, economic development is also losing momentum in the USA. “The supply chain problems and the increased raw material prices are becoming serious problems,” said Lipkow.

In addition, it is questionable whether raising interest rates will actually stop inflation, since higher interest rates only have an indirect effect as they can depress demand when borrowing becomes more expensive again. On the one hand, however, the problems on the supply side are causing prices to rise – currently especially on the energy markets – on the other hand, even after several interest rate increases, the relationship between borrowing costs and inflation would still not be on the same level, so that companies would continue to ask for liquidity in the form of loans, to buy raw materials and sell products at higher prices. The now extreme inflation does not make rising costs an obstacle to raising capital, as long as interest rates are not raised to a level similar to the inflation rate. Should the Fed do so, however, it would likely completely cripple the debt-laden global economy, which is still closely pegged to the dollar. The Federal Reserve appears to be stuck in an impasse. At most, an easing on the supply side could have a positive effect on inflation.

onvista editorial team

Cover photo: Shatsko Yauhen / Shutterstock.com

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