Fed raises rates to 21-year highs as ECB prepares to raise rates another 0.25 point on Thursday

The Federal Reserve has woken up from its pause and has raised the interest rates of the dollar – the currency that moves the world economy – another 0.25 points. In this way, the body chaired by Jerome Powell adheres to the script that the markets had established, which took the rise for granted, and raises the official price of money to a range between 5.25 and 5.5%, its highest level since 2001.

The Fed has raised rates for the 11th time in just 17 months, a figure that confirms this cycle of monetary policy tightening the fastest in modern history.. In this period, the official price of money has gone from 0% in March 2022 to 5.25-5.5% in July 2023, adding strong pressure to indebted households and companies and strengthening the dollar against other currencies.

The governors of the US central bank have chosen to make loans even more expensive despite the drop in inflation in recent months. The latest CPI reading in the US was 3% year-on-year in July, almost half the rise in prices registered in the euro area (5.5% in June).

However, the problem continues to be core inflation, which has barely dropped 1.8 points in the last nine months and is still at 4.8%.. This indicator —which excludes from the calculation the price of energy and the most volatile food— reflects well to what extent inflation has infected the core of the most stable prices in the economy. For this reason, core inflation is the metric that central bankers look at the most when making their decisions.

In addition, the Fed is finding an economy that is holding up better than expected.. Although interest rates are very high, spending and confidence of American consumers remain strong. Likewise, unemployment remains at historic lows, which makes it easier for workers to have more room to get better wage increases.. This possibility worries the Fed, which wants to avoid at all costs a wage spiral that drags prices down and prolongs the inflationary outbreak.

However, there is still no sign that this spiral is taking place.. Inflation continues to fall and the economy has not yet entered a recession, as several analysts predicted.. This conjunction of factors encourages the “soft landing” hypothesis, that is, a controlled decline in inflation that does not cause a contraction in the economy.

On Thursday, Lagarde's moment

The Fed's decision is known just 24 hours before the European Central Bank (ECB) meets on Thursday to foreseeably approve an increase equivalent to the one decided on Wednesday in Washington. The markets take it for granted that there will be a rise of 0.25 points, which President Christine Lagarde herself and the governors take for granted.

If it materializes, we would be facing the ninth rise in a year that would take the official price of the euro to a range between 3.75% for deposits and 4.25% for main refinancing operations. Two figures that represent maximums in the 21 years that the European currency has been in circulation.

More than the rate hike in July, the crux of the matter at Thursday's meeting in Frankfurt will be what will happen to interest rates after the summer. The next ECB meeting is scheduled for September and the governors have not yet agreed on whether there will be a new rate increase. In this sense, the words that Lagarde pronounces at the press conference after the announcement and the statement issued by the ECB will be key to anticipating future movements.

The ECB has a particularly complex role because its decisions affect 20 countries with different economies and fiscal situations.. Furthermore, unlike in the US, the eurozone economy is in a state of stagnation. “In this context, we believe that the probability of a rate rise for September is receding, and we could be facing the last rate rise of this cycle, as long as prices continue with a downward trend,” says Cristina Gavín, head of Income Fixed in Ibercaja