The sound becomes sharper Fed sees two rate hikes in 2023

Status: 16.06.2021 8:59 p.m.

As expected, the US Federal Reserve left its key interest rate unchanged. However, the loose monetary policy will not go on forever. The stock markets are falling, and the euro is also falling. Despite the waning corona pandemic and rising inflation rates, the US Federal Reserve continues to keep its key interest rate in a range between 0.00 and 0.25 percent. The monthly bond purchases of $ 120 billion are also expected to continue for the time being. At least until progress is made towards achieving the bank’s goals. In particular, this means “considerable progress in terms of price stability and employment”. This was stated by the monetary authorities after their two-day routine interest rate meeting in Washington. According to Fed Chairman Jerome Powell, the Fed is still a long way from achieving its goal: “But we are making good progress.” The bank continues to blame temporary factors for the recently stronger rise in inflation data. At the same time, she expects inflation to rise to 3.4 percent this year and drop to 2.2 percent in 2022. There is also increased economic activity and employment. Powell said the discussion about scaling back the extremely loose monetary policy had begun. The point is when it will reduce its regular bond purchases. However, Powell was not specific. Basically, the Fed chief said that if you will, you have talked about wanting to talk about the subject. With such cautious wording Powell should try to avoid panic-like reactions in the financial markets.

Two rate hikes envisaged in 2023

For the first time since the outbreak of the pandemic, however, the monetary authorities signaled that there could be two interest rate hikes of half a percentage point each in 2023. So far, the Fed’s interest rate projection provided for an unchanged monetary policy with a key interest rate close to zero. After all, seven monetary authorities are now even of the opinion that a tightening could come next year. Not only has the interest rate forecast been raised, expectations for economic growth and inflation are also higher in some cases. For this year, the Fed is expecting macroeconomic growth of 7.0 percent instead of the 6.5 percent previously expected.

Share prices are falling

Wall Street reacts with price losses, all leading stock indices give way in an initial reaction. The leading index Dow Jones lost around one percent, the other indices are slightly below. Prices are also falling on the bond market, with the yield on ten-year US government bonds increasing to 1.56 percent. The euro is losing significantly against the dollar and is currently trading at 1.2026 dollars, around one cent less than in today’s trading

Investors in high spirits Why the DAX rushes from record to record

Status: 14.06.2021 4:03 p.m.

While the economy is only slowly picking up pace after the Corona openings, the German stock market does not seem to be stopping. What are the main reasons for the price boom? From Lothar Gries, tagesschau.de The German leading index DAX rose by up to 0.7 percent in the morning and climbed to a record high of 15,802 points – the 23rd record this year. The index has risen by 15 percent since the beginning of the year. The stock exchanges are also in record-breaking mood at the European level. The Stoxx 600 index, comprising 600 values, also climbed 0.7 percent today and reached its 38th high this year with 460.51 points. The stock markets are fired from several sides. The most important driver is the expansionary monetary policy of the central banks in the USA and Europe. Since the European Central Bank (ECB) lowered the key interest rate to zero on March 10, 2016, i.e. more than five years ago, the returns on traditional savings offers from banks and savings banks have also shrunk to such an extent that even risk-averse German investors are looking for alternatives have looked around. In addition to real estate and precious metals, stocks are very popular.

More and more shareholders

In this country there were as many shareholders last year as last year in 2001, as determined by the German Stock Institute (DAI). According to this, 12.4 million people in Germany have invested in the stock market, i.e. they owned exchange-traded securities such as fund shares or stocks. Compared to 2019, that’s an increase of 2.7 million or 28 percent. The downward trend of previous years has thus been completely reversed. After the dot-com bubble burst in 2000, the number of equity investors in Germany steadily declined – until interest rates sank to virtually zero. But the ECB has not only boosted the number of shareholders and thus share investments, it is also active on the capital markets itself. In order to keep the economic effects of the corona pandemic as low as possible, the central bank is pumping many millions of euros into the market every day. To do this, it buys bonds issued by governments and companies. By the end of March 2022, she wants to spend the gigantic sum of 1.85 trillion euros, a number with twelve zeros. A considerable part of it flows into the stock market and drives prices to ever new heights.

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No end of the flood in sight

In the past few weeks, there have been repeated suspicions that the central banks in Europe and the USA will soon be able to turn the money off again because inflation is reporting back and price increases have shot far beyond the monetary authorities’ targets. But both Jerome Powell, the head of the US Federal Reserve (Fed), and ECB President Christine Lagarde initially gave the all-clear. Just today, Lagarde said in an interview with the magazine “Politico” that the time was not yet ripe for a discussion about an end to the crisis bond purchases by the central bank. “It is far too early to debate these issues,” said Lagarde. The economic recovery must be firm, solid and sustainable. Don’t take a patient’s crutches off until the muscles begin to build up sufficiently – so that the patient can move on their own two legs again.

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V-shaped economic recovery expected

In addition, investors are assuming that the pandemic-related restrictions will end soon. “The pandemic is no longer an issue at the latest with the now significantly lower number of new infections, and investors also seem to be able to come to terms more and more with the fear of inflation,” says market expert Milan Cutkovic from brokerage firm Axi. With the decline in Covid-19 restrictions, growth expectations are skyrocketing around the globe. The Organization for Economic Cooperation and Development (OECD) expects the global economy to grow by 5.7 percent this year. For Germany, the federal government expects growth of up to four percent. The prognosis from the beginning of the Corona crisis that there will be a V-effect in which the economy first collapses, but then quickly recovers, seems to be confirmed. This is rather good news for equity investors, because they hope that a growing economy will generate increasing profits and thus rising prices for listed companies.

Price turbulence ahead?

This combination of a zero interest rate policy, a glut of money from the central banks, a growing number of shareholders and the expectation of a rapid recovery in the global economy is driving share prices to ever new heights. But the air is getting thinner. Many investors are watching the Fed’s monetary policy deliberations this Wednesday. It is true that the Fed is not expected to deviate from its current course and end the boom in the financial markets. “But their projections on inflation, interest rates and the economy could cause price turbulence,” says Naeem Aslam, chief market analyst at the brokerage firm AvaTrade.

Despite rising inflation Why the ECB is not raising interest rates

Status: 10.06.2021 8:28 a.m.

Inflation is increasing in many European countries. Nevertheless, the European Central Bank wants to stick to its loose monetary policy. How long can she keep this course? By Klaus-Rainer Jackisch, MR The circular saw is still running. But the little wood that is left is not enough at the front and back. The large warehouse in the North Hessian Baunatal is usually well filled. But wood has been in short supply for weeks. “There has never been anything like it,” says Zimmermann and company owner Peter Hellmuth. The specialist fears further bottlenecks in the summer. Although demand is booming, there could even be short-time working. Because in Corona times there is more handicraft, building and tinkering, but also because the USA and China are buying empty the world market, there is currently too little wood . In April prices were almost 30 percent higher than in the same month last year, and the trend is still increasing, according to the Federal Statistical Office. Also at other raw materials are skyrocketing : Iron, steel and aluminum scrap rose by more than 60 percent, pig iron costs almost a quarter more, and the prices of electronic circuits rose by around 14 percent.

Above all, energy is more expensive

But energy prices climbed the hardest. Imported electricity, which is becoming more and more important because the amount of energy generated from sun, wind and water fluctuates sharply, even rose by 200 percent. People also had to dig deeper into their wallets for electronics and food. Inflation is back. It is coming with great strides. It is currently 2.5 percent in Germany . For the autumn, the Bundesbank and many economists expect inflation rates in this country of over four percent. Such values ​​have not existed for almost three decades. The last time the prices climbed above the four percent mark in 1993. At that time, inflation was 4.5 percent, according to statisticians. The price surge is particularly noticeable in Germany: the return of VAT to the old values ​​and the massive CO2 pricing since the beginning of the year are making themselves felt. The upturn in the economy does the rest: Through successes in vaccinations and easing, the demand for goods and services of all kinds is increasing, while at the same time supply is scarce – all of this is causing prices to go up.

Hardly any compensation through higher wages

Also in Europe: There the inflation rate rose to 2.0 percent in May. In addition to Germany, people in Austria (3.0 percent), Estonia (3.1 percent) and Luxembourg (4.0 percent) in particular have to pay more. All of that hurts, because because of Corona there are rather poor results in the wage rounds and therefore hardly any compensation. This makes price increases even more noticeable. But none of this makes much impression on the European Central Bank (ECB). It is expected that the company’s own forecasts, which will be updated this week, are well above the old estimates. It is also becoming apparent that inflation will by no means abate in the second half of the year as originally expected, but rather, on the contrary, reach new highs. But the monetary authorities in Frankfurt’s Eurotower see no reason to act. For weeks now, the members of the ECB’s Executive Board have repeatedly emphasized that the economy is recovering well, but currently still needs the support of an ultra-loose monetary policy. A repayment of the controversial bond purchases or even a turnaround in interest rates is not even hinted at.

Worried look at the financial markets

Instead, the ECB continues to pump billions from its Corona aid program PEPP into the markets at great speed – currently it is around 80 billion euros per month. This is intended to offer sufficient capital on favorable terms and to keep interest rates low. “The ECB has committed itself to ensuring favorable financing conditions during this phase,” said ECB President Christine Lagarde in Paris last week. This promise will also be kept. In fact, the ECB is not that unhappy about the price surge. The self-imposed inflation target of almost two percent has not been achieved for about ten years because one crisis chases the next. If this is different this year, it could be sold as a great success in your own monetary policy – even if the pendulum swings beyond your own target. In addition, one looks at the financial markets with concern: there share prices, also and precisely because of the ultra-loose monetary policy, have reached a level that has long been decoupled from the real economy in many areas. The central bankers fear that a change in monetary policy could lead to violent reactions and shake the fragile house of cards.

Debt rose sharply

And then there are also the debts: In southern Europe in particular, they have risen again to astronomical heights due to the collapse of tourism in the wake of the coronavirus crisis: Greece, for example, currently has a gross domestic product debt of around 205 percent. This is the highest level in the euro zone and more than during the Greek crisis. Italy, too, is groaning under excessive debts and ailing banks. An increase in the interest rate would not be right. Italy’s central bank chief Ignazio Visco is therefore particularly busy when it comes to sticking to the current monetary policy: “Large and sustained increases in interest rates are not justified by the current economic outlook and will be countered,” he said at the annual meeting of the Banca d´Italia in Rome. In fact, a new debt crisis in the euro zone, triggered by rising interest rates, would be the last thing the monetary union could use now. The central bank governors from Germany and the Netherlands, for example, cannot do much against all of these arguments. They have been calling for an exit from the ultra-loose monetary policy for a long time, but they are in the minority.

Criticism of the policy of the US Federal Reserve

So there are many reasons why the majority of monetary watchdogs prefer to keep their feet still and save themselves over the summer. A change in monetary policy at the council meeting this week is not expected, not even with a hint that it might be imminent. Only the pace of bond purchases could perhaps be slowed down a bit. But that too is unsafe. How long the ECB can continue on its course, however, also depends on the world around it. In the USA, for example, where the inflation rate is now 4.5 percent and the economy because of the two trillion corona aid program of the Biden government is slowly starting to overheat , criticism of the Federal Reserve’s loose monetary policy is growing louder. Economists such as the former IMF chief economist Olivier Blanchard or the leading economic advisor of Allianz, Mohamed Aly El-Erian, fear that the corona crisis could have changed the structure of the economy. It is therefore not at all clear that inflation will recede again quickly. If the central banks act too late and then abruptly, this could lead to upheavals in the financial markets and a recession. The next few months are therefore likely to be uncomfortable for the European monetary authorities. And also for the people in the euro zone. Because one thing is clear: it will be even more expensive.

Poland’s high inflation With price jumps from the pandemic

Status: 08.06.2021 8:12 a.m.

The Polish inflation rate is well above the German rate – now more than five percent. In many ways, this is a consequence of the pandemic, experts say. But when will the central bank react? From Martin Adam, ARD studio Warsaw The pandemic is not over yet when another topic is pushing the front pages of Polish newspapers. “Why so expensive?” Asks the “Gazeta Wyborcza”. The “Rzeczpospolita” replies: “We pay for growth with inflation.” In fact, what is happening in Poland is what financial experts in Germany are warning of: the inflation rate is rising – currently to a ten-year high of well over five percent, according to the standardized European calculation. That is one of the highest values ​​in the European Union. For comparison: In Germany, the inflation rate was 2.5 percent in May .

Devaluation clearly noticeable

The devaluation of the Polish zloty is clearly noticeable, explains financial market expert Pawel Majtkowski. “Compared to last year, wages have risen by ten percent, but the prices of fruit and vegetables by 20 percent. So we are already feeling the price increases,” he says. “In addition, there are higher production costs, transport costs and the costs of higher wages.” All of this is reflected in prices. Inflation is most evident in the case of fuels. According to the national statistics office, gasoline and diesel for private cars have become more than 30 percent more expensive within a month.

“Polish economy is doing well”

But don’t panic, it’s all normal and a consequence of the corona pandemic, explains economic advisor Lidia Adamska. “Inflation in Poland reflects processes that we see in the post-Covid landscape around the world. But the Polish economy is doing well,” she says. “The gross domestic product is growing, the employment and unemployment figures are also optimistic.” There are various factors that are currently weighing on the Polish currency, only some actually have to do with the corona pandemic: The low interest rates, which are supposed to stabilize the economy, make money cheap. It is available in large quantities, which always carries the risk of being devalued. After the rapid slump last year, crude oil prices are also picking up again, making gasoline and diesel more expensive. In addition, there are higher food prices because Polish agriculture has not recovered from the past two years of drought. A bad harvest means high prices. With restaurants and hotels that are slowly reopening in Poland, demand is also increasing.

Raising the minimum wage is having an effect

The political decision at the beginning of the year to increase the gross minimum wage to 18.30 zloty per hour, the equivalent of around 4.10 euros, also has an impact. This is supposed to distribute the Polish economic boom more fairly. However, the service industry in particular, which has been shaken by the corona lockdown, is passing the higher wage costs through to customers. The bottom line is that everything will be expensive. But it will certainly be countered soon, suspects the economics expert Ignacy Morawski. “In a sense, inflation is the price of low unemployment,” he says. “I suspect the central bank will soon raise interest rates to control inflation.” When exactly this will happen and how far inflation will rise, hardly anyone in Poland has yet wanted to make a forecast.

By Klaus-Rainer Jackisch, Mr It is still a bit strange for ECB President Christine Lagarde, the new setup at the press conferences, which premiered in March. For around 22 years, the President, Vice-President and ECB spokesman sat behind a long podium table to inform the public about the latest decisions after the Council meeting. However, because the central bank wants to be fresher, more modern and more oriented towards the population, the information is now available behind standing desks on stylish steps in high-gloss white.

Economic situation “not significantly changed”

Modern chic, which cannot hide the fact that the majority in the ECB Council remains true to its monetary policy: After the speed of the bond purchase program from the Corona emergency program PEPP was accelerated in March, the tense-looking ECB President tried hard today, always to emphasize again that the ultra-loose monetary policy will continue in full swing and at an accelerated pace. Because “the economic outlook remains gloomy,” said Lagarde. There are slight signs of recovery. Overall, “the economic situation in the euro area has not changed significantly.” Accordingly, as expected, key interest rates remained at the record low of zero percent. The core of the PEPP is the massive bond purchases: the central bank wants to pump 1.85 trillion euros into the markets by the end of March next year by purchasing bonds of all kinds. More than half has already been spent. If the accelerated pace of purchases remains, the fixed volume will be reached much sooner. Therefore the question arises: What comes after?

Will the interest rate turnaround come in June?

For some time now, the “hawks” in the Governing Council, that is, the representatives of a tight monetary policy, have been sniffing their chance to set the course for the beginning of the turnaround. At the current council meeting yesterday and today they still kept their feet still. But the pressure should increase by the next meeting in June at the latest. Then there is new economic data from the ECB. The “hawks” hope that the first vaccination successes in some euro countries and significantly improved economic prospects will pave the way for markets and the population to get in the mood for a normalization of monetary policy. Strong supporters are the Dutch central bank chief Klaas Knot, who wants to reduce bond purchases as early as the next quarter. His Belgian colleague Pierre Wunsch and, of course, Bundesbank President Jens Weidmann are going in a similar direction. Your convincing argument: The financial markets must slowly be adjusted to the turnaround in monetary policy. If the swing comes too abruptly, the unrest is too great, and serious upheavals could occur, especially on the stock markets, which nobody wants. The significantly increasing inflation in the euro area also offers the justification for the monetary authorities to act. In March, the inflation rate in the euro area was 1.3 percent, after it was minus 0.3 percent in December.

The stock exchanges react sensitively

The ECB President had to experience just a few weeks ago how fragile the mood on the stock markets is. Given the sharp rise in inflation rates, yields rose on the bond markets because investors expected the central banks to tighten their reins – a diabolical development from the point of view of investors on the stock market, who reacted very coldly. An extremely nervous Lagarde therefore assured after the March conference that a change in monetary policy was not imminent – and received flanking support from the entire Board of Directors, which never tired of insuring more or less the same thing. The US and UK also joined the ECB; there the central banks struck in the same vein and thus again ensured calm and rising prices on the stock markets. But now the international unity is beginning to crack: yesterday the central bank of Canada decided as the first leading central bank in the world to reduce its bond purchases. From Monday, the monetary authorities there will only buy government bonds in a volume of three billion Canadian dollars per week, they said in Ottawa. So far it has been four billion. The low key interest rate, however, remains unchanged at 0.25 percent. The reduction in Canadian bond purchases was received with great surprise in the financial markets. It is possible because the economic outlook has improved significantly in view of the major vaccination successes in the North American country and the recovery on the labor market is also making great strides.

The “hawks” are still in the minority

But the “doves” in the Governing Council – and thus the vast majority in the body – are not even thinking of following this example. Lagarde made this very clear today: “We did not discuss plans in the Governing Council to phase out the PEPP program,” said the President. “That would also be completely premature.” A clear hint to the “hawks” not to be too hasty. Because because of the messed up vaccination campaign of the EU, the economic recovery in the euro area is much lower and is dragging on like chewing gum. Compared to the major economies in the USA and China, the data and economic conditions in the euro zone are more than disappointing – especially since the third corona wave has the old continent firmly under control and there is currently no sign of improvement. So all eyes are already now on the coming ECB meeting in June. It should be decisive for the further course of action. Then it will show whether the economy is still so weak that the monetary authorities may even spice up their PEPP program a second time because the funds planned so far are insufficient – or whether the economic forecasts are so promising that the “hawks” will last can finally initiate the long-awaited turnaround in monetary policy.

By Klaus-Rainer Jackisch, MR New money to stimulate the ailing economy is generated by the European Central Bank rather silently and unspectacularly. To combat the crisis, the central bank does not buy meters high paper or tons of paint to use to print new banknotes. Their delivery vans also do not transport cash from the catacombs of the Eurotower. And there is no printing press in the cellar that rattles, runs hot and steams vigorously. No, central bank money is usually created with a few clicks of the mouse on the computer – and in times of Corona even in the home office. The ECB thus produces book money, writes it in its books and distributes it on the markets.

Almost two trillion just for PEPP

1.85 trillion euros are generated almost incidentally in this way to combat pandemics alone. For this huge sum, the ECB buys bonds on the international financial markets in its PEPP program, which was set up especially for the coronavirus pandemic: government bonds, for example, with which the euro countries raise money for their budgets. Municipal bonds, the proceeds of which municipalities use to finance a new waterworks or the renovation of their town hall. And corporate bonds, which companies use to finance the development of new e-cars, economical washing machines or unusual chocolate creations, for example. Some of these bonds have excellent credit ratings and sell like hot cakes. You shouldn’t have others in your depot. The ECB will buy them anyway if they do not fall below certain criteria. The large amount of money that flows into the cycle is supposed to keep the economy going. It enables banks to lend companies cheaply so that they can continue to exist and hopefully expand again soon. Overall, it lowers interest rates because the central bank buys almost everything and the issuers can easily get rid of their bonds: So you only have to pay low interest. And finally, it provides the entire system with sufficient liquidity so that there are no bottlenecks. Since the financial crisis, the ECB, like other central banks, has seen bond purchases as a panacea for getting the economy going again. She didn’t really succeed. But at least the economy was able to recover a little for a while and did not slide down completely.

Risks and Side Effects

The side effects of this monetary policy are visible everywhere: the stock markets are exploding as if there is no tomorrow. Because of a lack of returns, the money flows to the stock exchanges. In the real estate markets, the home is becoming a barely affordable luxury property. After all, the sheer mass of liquidity also produces inflation in the long term, so it devalues ​​the money if it is not collected again in time. The first signs are already noticeable in real life. Another phenomenon that has so far received little attention is developing more in the dark. Experts call it the “zombization” of parts of the economy – a development that causes great damage in the long term and is likely to further reduce the level of welfare. The somewhat creepy term describes companies for which the large amount of cheap money from the ECB ensures their survival, although under normal circumstances they would have been bankrupt long ago. Either because your business idea is out of date or you cannot adapt to new circumstances. Or finally, because they are simply working inefficiently. So there are companies that can no longer pay their interest from current profits and would therefore have to file for bankruptcy. But given the current conditions, they can easily get more loans to service their interest.

Thousands of “zombie” companies in Germany alone?

The Cologne Institute of the German Economy estimates that around 5000 such “seemingly dead” companies have emerged in Germany alone in the wake of the pandemic. Their processing is also prevented because the obligation to report bankruptcy is currently suspended in this country. Worldwide, the share of such “zombie” companies is now around 18 percent, estimates the Bank for International Settlements in Basel (BIS), the central bank of the central banks and, so to speak, the mother of the entire central banking world. This value is the highest ever measured. Before the crisis it was twelve percent. This is partly due to the corona crisis. But the BIS experts have calculated that around 70 percent of these companies have no chance of getting back on their feet even without the virus. Instead, they would be artificially kept alive with the cheap money. The BIS has viewed this development with great concern for years. That is why it repeatedly calls on its members to end the loose monetary policy and return to reasonable interest rates. From an economic point of view, dragging sick and unproductive companies through is fatal in the long term because it lowers the welfare of societies and thus widening the gap between rich and poor.

Innovation slowed down, dynamism paralyzed

The structural problems of the European economy, which have at least been aggravated by the ECB policy, can be seen in bare figures: The productivity of workers in Europe has stagnated for years and continued to decline during the crisis. The number of start-ups, particularly in Germany, is also falling. In the land of inventors and inventors, the volume of patent applications is also stagnating. In fact, the monetary policy of the ECB is also causing economic dynamism in the euro zone to slacken because the “seemingly dead” companies are clogging the system. Because they occupy market areas and thus make it more difficult for new, innovative companies to enter. “Zombie” companies tie up capital, expertise and skilled workers that are lacking elsewhere in order to get new developments off the ground. The OECD has been warning of these developments for years and has repeatedly made it clear that Europe in particular is falling behind in global competition. Because in order to be able to keep up with an aggressive China and the self-conscious USA, functioning, dynamic economies are needed in Europe that are characterized by high innovative strength. Otherwise, they will not be competitive in the long run. However, this is exactly what the current monetary policy prevents.

ECB fears turbulence in the financial markets

The ECB is well aware of these connections. But when it comes to choosing between plague and cholera, it is better to stick to current politics. Even the appearance of a change in monetary policy immediately triggers unrest in the financial markets, as the rise in bond yields a few weeks ago as a result of higher inflation rates showed. The ECB is not primarily concerned with the welfare of the financial markets. But severe turbulence there always has very negative consequences for the real economy – especially for the labor market. ECB boss Christine Lagarde will probably also assure this week after the council meeting that the ultra-loose monetary policy will be continued. In fact, as announced in March, the pace of bond purchases has increased significantly in recent weeks. The ECB regards this monetary policy as a blessing. But how much it will become a curse for the economy in the long term will only be able to be assessed in years.