September 26, 2022

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The US Federal Reserve could take a whole new approach – E24

Quantitative easing can be followed by quantitative easing. No central bank has done this on a large scale before.

Investment strategist Halfdan Grangaard at Handelsbanken believes that US employment tells us more about inflation than it does about recovery ahead.
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– I think first of all the Fed rate meeting is the most exciting this week, says Halfdan Grangaard, investment strategist at Handelsbanken.

It mostly deals with the active allocation of shares and securities internationally.

A lot of the turmoil that we’ve seen in the stock market and bond market throughout the year has been driven by uncertainty and changes in expectations about what the Fed will do. Ukraine also contributed, but the most important thing was monetary policy, says Grangaard.

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The “Federal Reserve” is the nickname for the US Federal Reserve (the Federal Reserve System), and it will set the key US interest rate on Wednesday.

The sudden and strong growth in inflation meant that the Fed had to get more and more hawkish in its signals. Now they’re announcing big moves in interest rates, and we get another 50bp increase in the key rate, says Grangård.

The main policy rate in the United States is currently 0.5 percent. An increase of 50 basis points means it could be 1.0 percent from Wednesday.

The last time the US Federal Reserve raised interest rates that much was 22 years ago.

– It’s totally unusual. You usually want to see how the interest rate increases its impact on the economy, and not be in such a hurry as now, says Grangård.

Printed money – now it will be deleted

Many also believe that the US Federal Reserve will start with quantitative easing, which is the opposite of quantitative easing.

– It will be the beginning of the scale down. If they did, it would be a whole new area, says Grangård.

No central bank has ever done anything similar on this scale. Whereas quantitative easing is that the central bank increases the money supply, quantitative constraints are that the central bank wipes money out of the economy.

– The Fed informed that it would not sell what it has on the balance sheet. They should let the bonds they have mature, then not reinvest the money, but withdraw it, and then slowly but surely withdraw the liquidity.

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Norges Bank interest rate meeting

Norges Bank will also hold an interest rate meeting next week. On the other hand, this is a temporary meeting, since a complete analysis and monetary policy report is not presented at the same time.

At such intermediate meetings, they usually do nothing unless they have to. So we don’t expect any change from Norges Bank, says Handelsbank’s economist.

At the previous rate meeting in March, Norges raised the interest rate from 0.5 to 0.75 percent, adjusting the rate path more than ever.

– Grangård says there is a high pace of rate setting, but rate increases at meetings will likely come with a full review.

“The most important number of the month” changed the meaning

On the last days of the week, the US will present what during the entire pandemic has been referred to as “the hottest number of the month”: the number of jobs created outside of agriculture.

There is reason to claim that the inflation number is becoming more important, at least for the markets. It is always interesting to know the position of the labor market, but there is now more interest in wage pressure and how it leads directly to inflation, than in employment. Grangård says it’s a big change from the middle of the pandemic.

He believes that the recovery since the onset of the pandemic is more or less complete, with unemployment at roughly the same level as it was before the pandemic.

The central bank shifted from the split between wanting to keep interest rates low due to high unemployment, and at the same time wanting to raise interest rates due to high inflation. Both conditions now indicate that the Fed can raise interest rates, says Grangård.

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