The current economic situation deserves to be reviewed because it is beginning to move away enough from what we have known for a long time. After two long years of monetary restrictions in the form of shield It was to protect oneself from an enemy whose weapons and behavior were difficult to predict, such as inflation, which is not always attributable to the same causes, and with all the literature against it. art of war was the right one to defeat him, it was necessary to see things differently. Because, in fighting, other things can be neglected; It’s best to keep an eye on your clothes while you’re swimming..
The collateral effects of all this rate hike must become palpable if the cycles are realized, which happens, regardless of the duration of a situation of more or less dynamic or stable economies. And this happens when we begin to anticipate less joyful economic periods, also accelerating the effects if the price of money does not give way, which is what so many fundamental agents of the evolution of the economy are suffering.
We have had what could be described as unnatural situations, where markets have reacted well when the data were bad, essentially because they have taken the pressure off rates. In reality, they have reduced the desire and the need for central banks to continue to tighten monetary policy through further increases that the market is increasingly unappreciating, particularly in certain sectors and industries.
This situation has affected many, if not all: to those who want to invest and need money, to those who want to promote or undertake, to those who want to consume, to almost all those who do not want to save. More generally, also to the most indebted companies in the more mature value sectors that do not see the high rates offset by what so often accompanies this movement, a growing economy, especially since it has started to show a little more weakness. And also to the sectors with the strongest future growth, the growth sectorsbecause valuing their companies at current value involved discounting flows at high rates. It is true that this type of industry has benefited from a certain euphoria produced around aspects related to Artificial Intelligence. Whether all this is a bubble or not will be considered the globe gain volume.
At this point, it seems that we have to think about everything differently. The European Central Bank (ECB) had predicted well before June that it had to start “changing the game” and had little choice but to comply with what it had been telegraphed, perhaps a little earlier. This was the first time that the ECB had been ahead of the Fed in the first move to change the monetary paradigm. In a few days, the Fed will make its first cut, two and a half years after it started hiking and more than a year since the last increase in July 2023. It seems that there are now many reasons to a reduction of at least 0.25% and we could end up with -0.50%, if all these reasons continue to gain importance. Because there are, and many, including the evolution of the data itself.
It seemed that the Fed was only tasked with monitoring price stability, and we have already made several observations that point in the right direction, at the cost of some unexpected scares. But let us recall that the Fed has also been very worried about the labor market lately. In fact, Powell is not skimping when it comes to giving much more weight to this labor market from now on. Employment has also shown signs of increasing weakness, which is what motivated the Fed’s decision to end the pause. And it may do so with a more marked move, if these data become too bad. It would also not be good for this issue to put the market in a position where it expects the economy to evolve worse than soft landing as a preferred scenario, for which the Fed is also responsible.
There are many reasons to believe that the Fed will cut rates in a few days, without going too far. Among them, the issue of fiscal policy, which is rarely discussed, the US debt is high and the deficit does not seem likely to moderate, especially in an election year and in a situation where – Considering that some do not want to cut spending and others do not want to raise taxes, it will be difficult for them to renege on their principles at this stage. And everyone knows that lowering rates in this country would alleviate the financial cost of carrying this debt.
The Fed also extended, perhaps too much, this pause during which it did not begin to reduce rates based on the fact that inflation started the year with scares and continued without bending as expected. Also based on an economy that has done better than expected even and a fairly positive situation in the markets, perhaps supported by the excessive optimism surrounding the technology sector and derivative industries.
A final reason that could be valid at this point to end this pause is precisely the Fed’s interest in not losing credibility when it comes to anticipating the medium term. After having lost a large part in other stages where the transitory nature of inflation was defended, it is of vital importance for the Central Bank and for everyone.
In short, we have already reached the top of the slide different types and we must act, even if we will not reach the point from where we started two long years ago. We will remain halfway between this 0% level and current levels over the next two years, at least that is what the markets are predicting: around 3% in the United States and more than 2% in Europe. Although guessing what the natural level of rates is is another debate.
For now, we will enjoy a new period, for the sole pleasure of having to take into account more things than inflation and the reactions of central banks. We forget more fundamental aspects that, fortunately, are always present in markets such as the stock markets. We see this every quarter with corporate results, although we can also see some overreactions related to certain sectors.
Let us take advantage of the opportunities that arise because the markets are selfish and greedy. This is how we must proceed so that the necessary errors and trade-offs are created, pursuing points of improvement that neglect other decisions and steps that are perhaps less demanding, but safer. As the refrain of the song Badlands by Bruce Springsteen says: “The poor man wants to be rich / The rich man wants to be king / And a king is not satisfied / Until he rules all…”It is human nature that can be applied without having to do evil, and it is better to understand that this is so. Who said fear?
