The US Federal Reserve raised interest rates by a further 0.25 percentage points at its meeting on Wednesday. It is now in a range of 4.75 to 5.0 percent. The central bankers are attempting a balancing act with the latest interest rate hike, the ninth in a row: they are continuing to fight inflation while at the same time trying to keep the burden on the banks within limits.
Rising interest rates are likely to further increase the pressure on the banks. However, a hasty end to interest rate hikes could fuel inflation again, which has recently fallen slightly. The Fed has a choice between plague and cholera. Not least because of this, it is now proceeding more cautiously and raising interest rates more slowly. In the past year, the interest rate increases of 0.5 to 0.75 percentage points were significantly larger than in the current one.
After the banking dramas of the past few weeks, many investors had apparently hoped that the Fed would take a break, even if that was not particularly likely. After it became clear that interest rates would continue to rise, the US stock index S&P 500 fell significantly. At the start of US trading on Thursday, it recovered again. Yields on US government bonds with a term of ten years fell on Wednesday evening from 3.6 to a good 3.4 percent. In the meantime, they too have risen again slightly. Bond prices and yields move in opposite directions: if the price of a bond rises, the yield falls.
The nervousness is high
Equities down, bonds up: The markets’ initial reaction to the renewed rise in interest rates shows that the fear of a further escalation of the banking crisis has not been banished – even though the central banks have taken far-reaching measures to stabilize the banking system.
All in all, the nail-biter continues. Fed Chairman Jerome Powell indicated a change in monetary policy on Wednesday: It is no longer assumed that “ongoing interest rate hikes will be appropriate to dampen inflation”. However, this does not mean that there will be no further rate hikes. At least one further rate hike is expected in the current year and has already been priced in by investors.
Markets are likely to remain shaky until the Fed’s roadmap becomes clearer. The past two weeks have shown that, in addition to the well-known risks, the turnaround in interest rates also harbors risks that are not obvious at first glance – and which the regulators have evidently not adequately sounded out. Investors should therefore be prepared for further fluctuations.
Also read: “Don’t fight the Fed” is history
Anyone who wants to bet on an end to interest rate increases in the USA in this environment can speculate on the recovery of tech stocks. After their crash last year, the stocks of many tech companies have recovered significantly since the beginning of the year. If the interest rate trend turns, that would mean further tailwind.
Because of the high level of uncertainty, however, investors are well advised to stick to established, solidly financed corporations. You will find what you are looking for, for example, at American chip manufacturers. The recovery there is in full swing, with political support. Subsidies in the billions are intended to boost US chip production and make it more independent of China. As a result, Nvidia shares, for example, almost made up for the price losses of the past year.
Also read: Bonds, gold, funds – where is your money still safe?
