Are Interest Rates Turning Around?

US Fed Chief Jerome Powell announced last night to a very unsurprised audience that the Federal Reserve will begin to scale back its bond purchases this month. In light of the economic recovery but even more so due to the recent substantial rise in inflation, it is indeed prudent to ease off the easing and Jerome Powell emphatically reiterated that the Fed would taper out its bond purchase program very gradually and carefully. The announced Fed procedure is somewhat controversial, though; quite a few market players and economists accuse the Fed of being behind the curve and that its ex-post-facto action to combat inflation is actually making it worse.

Whether the market is right on the money remains to be seen. We still think it is likely that price pressure will ease next year even though it looks like supply chain problems will probably stay with us for the long haul. However, it should be noted that forecast uncertainties resulting from the vicissitudes of pandemic reality are a bit like Jurassic Park. After all, oil stockpiles in the USA have risen significantly in the past six weeks, and there are now also signs of an easing in transportation costs.

We thus assume that monetary policy in Euroland and (to a slightly lesser extent) in the US will remain expansive. This argues against a sustained trend reversal in interest rates. One should not overlook, though, that some central banks have already raised interest rates this year and thus tightened monetary policy. One may conclude that the trend reversal in interest rates is already underway even if somewhat covertly.