The Federal Reserve Bank’s announcement that it would raise interest rates did not come as a surprise. It was primarily the way Fed Chairman Jerome Powell delivered that announcement last Friday that led to the stock market subsequently falling by 4 percent. That was the conclusion of chief economist Thijs Knaap of APG during the BNR Investors’ Panel.
“Central bank presidents generally always leave a backdoor ajar. A loophole with conditions and exceptions as to why they might not need to raise interest rates after all,” Knaap explains. But this time, according to the chief economist, that was clearly not the case. Powell kept it short; the message in his 8-minute speech was that the Fed would raise interest rates “no matter what”.
Lessons learned from the 1970s
Of course, there are all sorts of parties for whom that is bad news, the panel participants concluded. Companies that have a lot of debt, for example, will be paying more for it. “But in and of itself it is good news that central banks are taking their responsibility and fighting inflation,” Knaap argues. “It hurts now, but fortunately, we have learned from the 1970s that you can’t just let things run their course.”
Safe haven
The announced rise in interest rates resulted in a rising dollar exchange rate. Holding cash in the United States is more lucrative when interest rates are higher. But the timescale is also to blame for the rising exchange rate. The dollar has always been a safe haven in uncertain times, like right now with the war in Ukraine. According to the panelists, the fact that the expensive dollar is unfavorable for exports had not yet led to many complaints in the US. That did happen in the 1980s. “But the United States has also become a less industrial country since that time, and has changed into more of a service economy,” Knaap explained.
Listen to the entire investor panel here: https://bnr.nl/gemist?date=30-08-2022&time=13-05-21