Interest rates: How far will the Fed go with its interest rate decision after the yield increase?
The US Federal Reserve's monetary policy is forcing investors to engage in a new debate. Some interest rate hikes might be manageable for the stock markets, says DWS expert Gärtner. After that, it could become more difficult.
Kevin Warsh now finds himself in the same predicament as his predecessor Jerome Powell, who faced criticism from then-President Donald Trump for not wanting to lower interest rates. Even though Warsh was personally chosen by Trump for the influential position in the US Federal Reserve, he is now caught between Trump's demand for lower rates and the Fed's credibility.
With inflation persistently high at 3.4% in August, bond traders now assign a 77% probability that the Fed will raise the interest rate range to between 3.75% and 4.00%. Three out of twelve voting members of the Fed were in favor of raising interest rates on their most recent meeting, while Warsh, along with the rest of the board, voted for a rate pause.
If the Fed fails to raise interest rates again, its credibility could be severely undermined, leading to increased inflation expectations and higher risk premiums that could cause further turmoil in the US bond market. Additionally, Warsh's new communication strategy of providing less guidance to investors could further complicate the situation.
The potential economic consequences of a rate pause include higher financing costs for the entire US economy, which could negatively impact stock markets and jeopardize the Fed's credibility.
Written by urgent.news from Handelsblatt's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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