The Fed leaves rates unchanged, the effects on the ECB and European markets. Time to invest? The interview
After many predictions, the sentence of Fed it has finally arrived. THE interest rates Americans will remain high, at the highest level for over 20 years, unchanged between 5.25% and 5.5%. Behind the choice, only one great motivation: “L‘inflation it is still too high,” the American Central Bank says.
In fact, it was not enough to bring it from a peak of 7.1% to 2.7%. And despite the governor himself Jerome Powell declared that various objectives to reduce inflation have not been achieved, he did not however give up on reassuring citizens and (no less important) financial markets. The cost of money should not remain high forever; in fact, the first cut should arrive before the end of the year. It is expected to happen in November.
But it didn’t end here. Because only in March, less than two months ago, did the Fed leaders predict well three rate cuts in 2024, today things are very different. The forecasts of financial analysts suggest, in fact, that during the year there will only be a reduction (if all goes well!) for Americans.
But what consequences can failure to cut the cost of money in the United States have in Europe? And how did the markets react to the American central bank’s decision? To understand more, Affaritaliani.it he asked Gabriel DebachItalian Market Analyst of eToroa multinational social trading and multi-asset investment company.
USA, the Fed leaves rates unchanged. The market reaction
“The reaction of American market it was predominantly positive, despite a context of uncertainty,” explains Debach. “In detail, there are three main factors that influenced this optimistic interpretation.”
“We can summarize the first as ‘danger averted’”, states the analyst. “There was a palpable sense of relief among investors as Jerome Powell it has not shown itself to be as inclined towards restrictive policies as had been feared. Powell’s moderate tone and the use of the word ‘unlikely’ for further monetary tightening have in fact tempered expectations of more aggressive policies,” he explains.
Then, the slowdown in quantitative tightening. “The Fed,” continues Debach, “has announced a slowdown in the reduction of its balance sheet, with the transition from a contraction of 60 billion to just 25 billion dollars a month starting in June. This decision further eased investor concerns, suggesting greater liquidity in the financial system and reducing fears of an excessive tightening of credit conditions.”
In the end, the exclusion of further rate increases and stagflation. “The president of the Federal Reserve,” explains the expert, “during his speech, he excluded further increases in taxi and threw water on the fire regarding the discussions of stagflationstating that with a growth of Real GDP by 3% e an inflation below 3%, current conditions do not reflect true stagflation.”
The consequences for States
But while Powell reassured the markets by alleviating some immediate fears, his approach strongly guided by macroeconomic data could open the door to a renewed volatility in financial markets.
“The Fed, as well as investors, will become increasingly dependent on upcoming economic data — be it employment numbers, inflation or GDP growth,” Debach says. “This growing dependence,” he continues, “means that any new relevant data has the potential to shake the marketsintroducing an element of uncertainty that can make investments more reactive and less predictable.”
What changes for us Europeans
“The influence of the US market extends far beyond its borders, making the economic mood of the United States a decisive factor also for other international markets”, states the expert.
“Currently”, he continues, “if the Federal Reserve decides to keep interest rates high while the European Central Bank (ECB) follows a more accommodative approach, we could see the dollar strengthen against the euro. This dynamic would have significant implications: on the one hand, it could make European exports more competitive on global markets thanks to a weak euro; on the other hand, it could increase the costs of imports into Europe from non-European countries, thus influencing the prices of numerous imported goods,” he explains.
“Furthermore, if the US economy were to slow down due to the restrictive policies adopted by the Fedthis could reduce global demand, including for European exports. Such a development could push the ECB to reconsider its monetary policies,” adds Debach.
ECB, there is a risk that the Fed will influence Europe
“Despite the European Central Bank operates independently of the Federal Reserve”, states the eToro analyst, “its political decisions remain strongly influenced by the global economic context, in which the Fed plays a predominant role.”
And here’s some bittersweet news. “Definitely the ECB he will not take a step back from what is possible first rate cut expected in June”, he explains, “but in the same way we have observed that if the cuts in the United States are currently only one, in Europe these stop at two”, he adds.
Investments and volatility
Finally, speaking of investments, Debach has clear ideas. “It is safe to assume that we are still in the early stages of a bull market,” he says. “The volatility that could arise in the coming months is seen as an opportunity, given the earnings recovery and the imminent, albeit delayed, interest rate cut in the United States,” he explains.
“Furthermore,” he continues, “significant available liquidity can encourage buying during any significant retracements. A particular focus should be placed on regions and segments such as Europe and cyclical sectors, which benefit more from a rate cutting environment and show lower valuations, thus offering favorable investment prospects,” concludes the financial analyst.
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