Will the US Fed and European ECB Take Giant Steps Simultaneously?

[Image source=Yonhap News]

[Asia Economy Reporter Yujin Cho] The global financial market is on high alert as the United States and Europe are increasingly likely to simultaneously implement a ‘giant step’ (a 0.75 percentage point hike in the benchmark interest rate) ? an unusual move.

On the 7th (local time), the Wall Street Journal (WSJ) reported that Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), publicly pledged to “lower inflation even if it raises unemployment,” which is expected to lead to a 0.75 percentage point rate hike this month instead of 0.5 percentage points.

WSJ stated, “Fed officials are not trying to overturn market expectations of a third consecutive 0.75 percentage point rate hike ahead of the Federal Open Market Committee (FOMC) meeting scheduled for the 20th-21st, two weeks away,” adding, “Some officials hope to raise the Fed’s rate by about 1.5 percentage points from the current level to nearly 4% by the end of the year, and they will likely aim to achieve this in the remaining FOMC meetings this year.”

The market is also heavily betting on a ‘third consecutive giant step (0.75 percentage point hike).’ According to the Chicago Mercantile Exchange (CME) FedWatch tool, the probability of the Fed raising rates by 0.75 percentage points in September is currently priced at 74% in the federal funds (FF) futures market.

Chairman Powell previously declared in his Jackson Hole speech on the 26th of last month that despite concerns about rising unemployment, the Fed would raise the benchmark interest rate further and maintain a high level of rates for a considerable period. He said, “We will keep it there until we are confident the job (of curbing inflation) is done.” Tim Duy, Chief U.S. Economist at SGH Macro Advisors, interpreted, “Powell’s remarks and tone at that time clearly showed he was among those favoring aggressive rate hikes,” adding, “The Fed has already set its direction in broad terms.”

Lael Brainard, Vice Chair of the U.S. Fed and the second-in-command, also hinted at the possibility of three consecutive giant steps. In a conference speech held in New York that day, Vice Chair Brainard said, “To give confidence that inflation is coming down to the target level (around 2%), we will need to raise rates to a level that slows the economy for a while.” This was a hawkish statement emphasizing the continued need for rate hikes to curb inflation.

However, Vice Chair Brainard warned that it is time to balance the risks between raising rates sharply and not raising them enough. In particular, her remark that “the Fed (must fight inflation but) could pose risks of excessive tightening” triggered a rebound in the New York stock market.

Immediately after Vice Chair Brainard’s remarks, the New York stock market rebounded sharply. On that day, the Dow Jones Industrial Average rose 1.40% from the previous close, while the S&P 500 and Nasdaq indices surged 1.83% and 2.14%, respectively.

The Beige Book, the Fed’s economic assessment report released shortly after Brainard’s remarks, stated that “the outlook for economic growth remains generally weak.” Regarding prices, it noted that while inflation remains high, the rate of increase has somewhat eased, and the general expectation is that price pressures will continue at least until the end of the year.

[Image source=Yonhap News]

The European Central Bank (ECB) is also increasingly expected to raise rates by 0.75 percentage points at its monetary policy meeting on the 8th. Previously, in July, the ECB raised its benchmark interest rate for the first time in 11 years, deciding on a 0.5 percentage point hike, which was twice the usual increment. However, concerns over soaring inflation have increased calls for a giant step.

Bloomberg reported that the probability of the ECB implementing a 0.75 percentage point rate hike at the meeting on the 8th is 75%. If the ECB raises rates by 0.75 percentage points, it will be the second such hike since the euro was introduced in 1999. The ECB once implemented a 0.75 percentage point hike shortly after the euro’s introduction as a technical adjustment.

In August, the Eurozone (19 countries using the euro) consumer price index (CPI) rose 9.1% year-on-year, with food prices excluding energy continuing to rise. This surpassed the previous record high of 8.9% in July. According to The New York Times (NYT), about half of the Eurozone countries, nine in total, experienced double-digit inflation rates in August.

Additionally, Russia’s decision to cut off natural gas supplies to Europe has intensified concerns over energy supply instability and economic recession. Foreign media have noted that Europe is facing stagflation concerns due to energy volatility and a relatively vulnerable economic structure compared to the U.S., making a significant rate hike inevitable to defend the economy.

Jens Eisenschmidt, an economist at Morgan Stanley, wrote in a memo to investors, “The main decision at this meeting is whether the rate hike will be 0.50 percentage points or 0.75 percentage points.” He added, “There are clear arguments for both, but the side supporting a giant step over a big step is prevailing.”

This content was produced with the assistance of AI translation services.