Does hiking rates work?

Posted by: Paul Donovan

19 Sep 2022 2 min read
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Daily update

  • Financial markets are focused on the US Federal Reserve policy decision this week. The focus is “how big is the hike?” not “will hiking rates cut inflation?”. The Fed’s June policy errors included a focus on consumer price inflation. More and more of CPI is made up of prices that monetary policy has less and less influence over. The Fed is forced to create more disinflation and deflation in the areas where policy does have an influence.
  • US housing has been affected by policy tightening, with mortgage rates for new borrowers rising over 6% last week. Today’s National Association of Home Builders’ index is likely to reflect this. By lowering demand for home ownership, the Fed’s policy may encourage more people to rent: higher rents artificially raise inflation.
  • European Central Bank speakers are scheduled. The ECB faces a different economic position from the Fed—more exposed to energy prices, but a more energy efficient economy, with government price controls. This means that the ECB is unlikely to mirror the Fed’s actions.
  • The EU Commission faces a legal challenge over labelling gas and nuclear power as green energy. The question of definition is one of the biggest problems in ESG investing, and this issue is only likely to grow in importance.

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