USA: Fed means business
According to its chairman, Jerome Powell, inflation is much too high and the labour market too tight. The US central bank is therefore not only raising the key interest rate by 50 basis points, but is also starting to reduce its balance sheet.
The holdings of Treasuries and mortgage-backed securities are to be reduced by 30 and 17.5 billion US dollars per month, respectively, starting in June. After three months, the balance sheet reduction will be increased to the already communicated monthly amount of 95 billion. USD 60 billion will then be allocated to the portfolio of US government securities and USD 35 billion to mortgage-backed securities.
There is also information on the further outlook: According to Powell, interest rate increases of 50 basis points are on the table for the next central bank meetings. Meanwhile, increases of 75 basis points are not being considered. The US economy is strong enough to cope with higher interest rates.
The US money policymakers are thus driving on two tracks from June onwards. Interest rate hikes of initially 50 basis points will be accompanied by a reduction in securities holdings. The effect of the latter should not be underestimated.
The reduction of the balance sheet entails a huge withdrawal of liquidity. The reduction of securities holdings is therefore a substitute for interest rate hikes. Because the selling of bonds acts as a kind of amplifier, the Fed probably does not have to raise interest rates as high as it did, for example, in the 1970s or 1980s to get a grip on inflation.
The Fed is moving forward boldly. This was widely expected. Even the fact that the Fed is proceeding with interest rate hikes of 50 basis points for the time being does not cause a stir. Such a tight rate hike path is largely priced in.
The Fed has even undercut expectations somewhat. Bonds sales were expected to be as high as USD 95 bn per month right from the start. The fact that it is "only" USD 47.5 bn dollars in the first three months is thus surprising on the downside.
Meanwhile, the financial markets seem happy that the Fed has not announced an even more aggressive course. The dollar is weakening somewhat, yields are falling and the stock markets are rising.
The monetary policy baton now passes to the ECB. The European monetary policymakers should now take the cues from Washington and act as well.