Financial markets not yet impressed by central bank rate hikes

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While both the Fed in America and the ECB in Europe continue to raise interest rates, financial markets do not yet seem very convinced of the measures. With the increases, the central banks are seriously trying to suppress the soaring inflation. But the markets react less strongly than expected, says BNR’s house economist Han de Jong.

Jerome Powell, chairman of the Fed. While both the US and the European central banks continue to raise interest rates until inflation is seriously suppressed, financial markets do not seem very convinced of the measures yet. (ANP / Associated Press)

Although the economic situation in Europe is really different, the policy of Fed boss Jerome Powell is being closely watched in Europe. The US economy is also dealing with rising inflation, but those problems seem to be over sooner.

The differences between the two economies are indeed large, says De Jong. But so are the contracts. You can generally say that the American economy is ahead of the European one. ‘That’s why it makes sense for us to look into that,’ says De Jong. ‘We follow what happens there.’ In addition, the US economy is the best documented economy in the world. There is simply a lot of data available.

But the most important argument for the interest in the American economy, according to De Jong, is its impact. “The Fed’s decisions also have a major impact on our bond and equity markets.”

Macro numbers

The recently presented US macro data indicate that inflation is increasingly coming under control. You could therefore conclude that interest rate hikes by the Fed do indeed help. Correct, says De Jong. But there are also caveats.

“Retail and industrial production sales figures were very strong. And inflation is indeed falling, but that decline is disappointing.’ That combination should prompt the Fed to raise interest rates more quickly. As a result, capital market interest rates would go up and stock markets would go down. ‘That does happen, but not to a large extent,’ says De Jong.

These are the fluctuations of an economy

Han de Jong, BNR’s house economist

Those macro figures may therefore have been somewhat distorted, explains De Jong. The severe winter weather in December caused weak production figures, which led to a somewhat better result in January. “But these are the fluctuations of an economy.”

Job market

The American labor market, like that in Europe, is very tight. Economists are surprised why more people are not entering the labor market, says De Jong. ‘A big difference with Europe.’ The participation rate, the percentage of people between 15 and 75 who want to work, has increased in Europe. In America, that is actually decreasing and is even lower than before the pandemic.

An explanation is difficult to give. It is a mystery to labor market economists, says De Jong. ‘But if you think back to the pandemic, you see that the Netherlands has tried to save jobs with government support. While the Americans have increased benefits and given families money. Maybe that’s the reason, but it’s actually unclear.’

The Netherlands

At the same time, in your own country, you see that unemployment has risen slightly. From 3.5 to 3.6 percent. There is no need to be too negative about that, De Jong thinks. ‘More people have entered the labor market. The number of jobs is increasing. While the number of people wanting to work is rising slightly faster, unemployment is also rising slightly.’

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