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Federal Reserve: Rising interest rates, a strong dollar

2021-03-17T15:58:40.146Z


The rising capital market rates are putting the US Federal Reserve under pressure. For Fed Chairman Powell, the turmoil in the bond markets is a test.


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US Federal Reserve Chairman Jerome Powell: “If he doesn't say anything, it will move the markets.

If he says a lot, it will move the markets. "

Photo: Manuel Balce Ceneta / dpa

A few weeks ago the vigilante group marched into the financial markets.

At least that's how the investment expert Ed Yardeni describes it: he calls them "bond vigilantes", bond investors who, after a year of pandemic money glut, consider a surge in growth and inflation to be inevitable - and in anticipation of this they are demanding higher interest rates.

Ultimately, inflation reduces the purchasing power of their future income.

As a result, there is a sell-off mood on the bond market.

The prices have fallen, the yields have risen in reverse: the ten-year US government bond, which has an interest rate guide function, is quoted at around 1.6 percent, as high as it has been for a long time.

The march of the vigilante group puts pressure on those who are ex officio responsible for pacifying the financial markets: Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell.

So far, both have been demonstratively calm.

The US economy is far from overheating and the inflation fears are unfounded, said Powell.

In his opinion, a possible price increase would only be temporary.

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Central Bank in Washington

Photo: Leah Millis / REUTERS

The markets alone lack faith.

When Powell steps into the press this Wednesday after the two-day Fed meeting, nervous investors will be dissecting every sentence under a microscope.

Because while politics and central banks in large parts of the world are still fighting the corona virus, the bond markets have long been driven by another concern: that the US economy is doing too well.

Goldman Sachs is now putting the US growth rate this year at seven percent.

For many economists, in view of the impending boom, the interest rate turnaround has already been agreed.

The dollar has also risen in the wake of bond rates.

At the same time, the stock markets have gone into a tailspin because some stockbrokers wonder whether their money is still well invested in expensive tech stocks when other investments are finally generating tangible returns.

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In this situation, one wrong word from the central bank governor can completely upset the markets.

He only followed Powell's last Fed press conference with one eye and one ear, says Rick Rieder, a pension expert at asset manager Blackrock.

This time he will be careful: “If he doesn't say anything, it will move the markets.

If he says a lot, it will move the markets, ”said Rieder on CNBC.

Bad memory

"The Fed will try not to stir the dust, but that's easier said than done," warns Ryan Sweet of Moody's Analytics.

When Powell casually dismissed the rise in yields at the beginning of March, the market immediately acknowledged this with an additional premium.

Some observers see this as the harbinger of an event that has gone down in central bank history as the "Taper Tantrum".

When the then boss Ben Bernanke announced in 2013 that the market-supporting bond purchases would gradually expire five years after the outbreak of the financial crisis, the markets reacted with a fit of rage: bond prices collapsed, yields soared.

Powell once said that the event "left scars on everyone who worked at the Fed back then," including himself.

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So what should he do?

Best of all, advises Richard Bernstein, head of the investment company Richard Bernstein Advisor.

He recommends the Ferber method: let the baby cry until it falls asleep on its own.

For the good of the economy, investors would have to learn "to deal with reality," wrote Bernstein in the "Financial Times".

But like most parents, the Fed is unlikely to be able to persevere.

Because market turbulence could quickly infect the real economy.

Experience has shown that a bond sell-off leads to "contagion, illiquidity, bankruptcies, bankruptcies and volatility," the experts at Bank of America think.

Powell's European colleague Christine Lagarde has already granted the screaming investors the requested donation.

She announced that the ECB wants to accelerate its bond purchases and thereby depress yields.

The euro economy is too weak to cope with higher financing costs for companies, states and households, said Lagarde.

Investment expert Yardeni is not sure how the "battle of the titans" of his Bond vigilante group against the most powerful central bank in the world will end.

But he considers one thing to be inevitable: "There will be innocents among the victims".

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Source: spiegel

All business articles on 2021-03-17

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