November 27, 2021

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The side of the stock exchange according to the interest rate decision

The side of the stock exchange according to the interest rate decision

We expect supply chain throttling and commodity shortages to continue well into the coming year, and the same is true for high inflation.

This is the assessment of the US Federal Reserve regarding The central bank’s interest rate decision on Wednesday. The interest rate has remained unchanged, but the crisis support from the central bank will now gradually decrease.

What the central bank governor brought in was well received in the market, ending the day with several important stock indices with a record listing.

The Dow Jones Industrial Average rose 0.29 percent to a record high. The same applies to the broadly composed S&P 500 index, which rose 0.65 percent to 4,660.57 points, a new record listing.

The tech-heavy Nasdaq could set a new record after rising 1 percent.

Controversial

In the assessment from the central bank, they slightly changed their assessment of inflation from the previous one. They now acknowledge that the rate increase has been faster and more prolonged than central banks had anticipated, but they still haven’t given up on the controversial use of the word “temporary,” according to the report. CNBC.

“Inflation is high, which largely reflects factors that are expected to be temporary. The imbalance in supply and demand associated with the pandemic and the reopening of the economy have contributed to a significant increase in prices in some sectors,” the central bank wrote.

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They believe inflation will eventually fall to the 2 percent target, but it may take longer than expected.

The central bank still insists that the rise in inflation is temporary, indicating that pigeons still have the upper hand, wrote Paul Ashworth, chief economist at Capital Economics.

The term dove here refers to those who advocate a monetary policy that includes low interest rates, as opposed to the hawks, who believe that higher interest rates must be maintained in order for inflation to stagnate.

On his hind legs

Olaf Chen, head of global allocation and interest rates at Storebrand Asset Management, notes that Governor Powell indicated at the press conference that there may be no agreement on what is used in the use of the word “transient.”

He’s still confident that inflation will go down, but the fear we and many have is that it won’t go down as fast as it rose. Chen says the fear is that he’s on his hind legs a bit.

The central bank chose not to raise interest rates, as expected.

– Markets shout hurray that what came was as expected. Chen says there has been no hasty message that they will raise interest rates immediately next year.

The new thing that came out of the central bank’s decision is that it will reduce its monthly purchases of bonds, which is the first step on the road to reducing the crisis that the bank presented to the markets and the economy.

They want to reduce bond purchases by $15 billion a month, from the $120 billion they spend buying bonds every month at the moment.

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It was previously announced that they will now begin very gradual normalization, especially when it comes to phasing out bond purchases, says Chen.

35 billion every day

In the past 18 months, the US Federal Reserve has bought $120 billion in bonds per month.

– There are 35 billion NOK being added to the market every day, Chen points out, and he states he’ll feel normal when that money doesn’t come in any more.

– This amount will be reduced. This may be a catalyst, as you get less gasoline on the fire, but when there’s a correction, it’s hard to tell.

perfect storm

Recently, a perfect storm of unfortunate events, along with the Corona crisis that continues to create great waves for the global economy, has led to a rise in freight and commodity prices.

In Norway, food giant Orkla has announced significant price increases to customers and there are also warnings about Christmas shopping problems.

– Elisabeth Holvik, chief economist at Sparebank 1 Group, said in its monthly report that more and more companies are reporting “brutal” inflationary pressures, both from energy, raw materials, transportation and wages.

Inflation in Germany rose to its highest level in 28 years, and it has not been the highest in the eurozone since 2008 – during the financial crisis. In the United States, the situation is noticeably worse, where levels have not been recorded in 30 years.

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We haven’t been in this situation since the seventies. It may be similar to the mounting inflation problems we saw before the financial crisis, around 2006 and 2007, Danske Bank chief economist Frank Gollum told Bursen.

Fear of hyperinflation

One of those looking at it darker is Jack Dorsey, CEO of Twitter, who has warned that inflation in the US is rising, and says it will get significantly worse.

The top manager has sounded the alarm about hyperinflation, a term used when prices rise sharply at the same time that a currency is losing value.

Hyperinflation will change everything. Dorsey announced on Twitter that this is happening.

Exactly this fear is not shared by many.

Few people believe in hyperinflation, but we are a little more concerned about inflation. We fear inflation will fall more slowly than many think. If next year at this time we see inflation numbers between 3 and 4 percent, it’s still a little bit as high as what’s comfortable for the US Federal Reserve, says Chen.

In the US, consumer price inflation is close to its highest level in 30 years.