Slowdown on Wall Street after Fed report: Don’t rule out more rate hikes

On Wednesday evening, the US Central Bank presented the minutes of the previous interest rate meeting, when it raised interest rates by 0.25 percentage points to the range of 5.25-5.5 percent – the highest level in 22 years.

The report shows that most of the members were concerned that the battle of inflation was not over yet and that further tightening was needed.

In July, inflation was 3.2 percent compared to the same month in the previous year, while core inflation remained unchanged at 4.7 percent. The central bank has a long-term target of 2%.

“With inflation still above the committee’s long-term target, and the labor market still tight, most respondents still see significant upside risks to inflation, which may require further tightening of monetary policy,” the report said.

On the other hand, there were also many who argued that we should be cautious and look instead at the effects of past interest rate increases. The interest rate was raised from zero to 5.5 percent in less than a year and a half, an exceptionally rapid increase.

– On the guard

– The immediate impression is that this is a hardliner, says Handelsbanken chief economist Marius Gönsholt-Hof about the report. Hawking means a tighter monetary policy is the call.

Hof notes that the interest rate meeting was held before the inflation figures for July, which showed a slowdown in core inflation. On the other hand, the numbers for the real economy were generally strong.

It refers, among other things, to the Atlanta Federal Reserve’s Now Gross Domestic Product, which measures economic growth in real time. For the third quarter, the estimates are for an annual growth of 5.8 percent.

This, in turn, may contribute to prolonging the period of high inflation. The Fed will probably be very wary of core inflation getting a “second round” hike, even though the downward trend was evident in the latest numbers.

The market is still classifying a certain possibility that the interest rate will be raised again. According to CME Group, there is more than a 35 percent chance that the rate will be raised in November, if it is not raised at the September meeting, a 12 percent chance.

Hoff notes that market interest rates haven’t changed much since the report. He is now setting his sights on the central bank’s annual Jackson Hole conference, which takes place next week.

Much will revolve around signals about how long the high level of interest rates must continue in order to control inflation on a more permanent basis, says Hoff.

The leading stock market indices opened the trading day slightly lower on Wednesday. Towards the end of the trading day, the decline increased:

• The Dow Jones Industrial Average, which consists of 30 handpicked stocks considered important, fell 0.5 percent.
• The Nasdaq Composite Index, which is dominated by technology companies, fell 1.1 percent
• The Standard & Poor’s 500 Collective Index, which consists of 500 of the largest listed companies, fell 0.7 percent.

In August, the Nasdaq was down about six percent, but it’s still up 30 percent year-to-date.

Summers warns

The interest rate on 10-year US government bonds rose to 4.27 percent on Wednesday, not far from the peak in October 2022. The 10-year interest rate is often cited as the most important interest rate in the world, because it is a major influence. On other interest rates and financial figures around the world.

On Wednesday afternoon, Larry Summers, an economics professor and former finance minister, warned that the 10-year interest rate could go even higher.

– I do not see the current level of long-term interest rates as some kind of peak, Summers sayssaid Summers, who points to a large state budget deficit and that he expects higher inflation than in the past bloomberg.

On average, the ten-year interest rate has been 2.9 percent over the past two decades, according to Bloomberg. Summers envisions the 10-year interest rate could average 4.75 per cent over the next decade — possibly more.

– I suppose these higher long-term interest rates are here to stay – and if I had to bet, I think I’d bet they’re more likely to go up than down, says Summers.

Warns of expensive stocks

An increase in long-term interest rates is particularly negative for companies that are not profitable now, but are priced high because of the expectation of high future profits. Investors constantly rely on the present value of future income, which becomes lower when long-term interest rates rise.

The ten-year real interest rate, which is the ten-year interest rate minus expected annual inflation, has risen from minus one percent to 1.9 percent in just two years. The interest rate is now at its highest since the financial crisis 15 years ago.