US interest rates have been offended since Friday, a sign that investors now require higher compensation, due to inflation that will pinpoint their capital.
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After months of impassibility, the financial markets are starting to take seriously the determination of the Federal Reserve (Fed), the Central Bank of the United States, to fight against inflation. Interest rates followed brutally, Friday, March 25, the yield of US government bonds leaping on Monday, March 28 in the morning at 2.55%. This rate, which fell in July 2020 in the full pandemic of Covid-19 to a low of 0.5%, was still 1.72% in early March.
America comes out of several years of free money and investors now require compensation at the highest for three years, due to inflation, which will lock their capital. These rates are nevertheless derisory, much lower than annual inflation (7.9% in February). An explanation is in the war in Ukraine, which delayed the rise in market rates: during the panic, privileging performance safety, investors rushed to the green ticket and US assets, even if they were less remunerative. They then thought that the President of the Fed, Jerome Powell, would hesitate to squeeze the monetary tap not to add uncertainties to the war. The opposite has happened: the central bank believes that the Russian invasion will sustain inflation, because of the impact on energy and agricultural products it causes. It is necessary to add the partial closures of the Chinese economy due to Covid-19.
A very political choice
These external shocks strengthen bottlenecks that penalize the recovery of the economy and feed inflation, nourished by years of ultra-accommodative fiscal and monetary policies and the labor shortage. As a result, the operators believe that the Fed, which described until December “provisional” inflation, will tackle rising prices by increasing its rates, at a half-point per meeting, instead. 0.25% initially considered.
At this rate, its key rates, which determine the rent of money in the short term, could increase from 0.25% to 2.75% late 2023. Long rates, which serve to finance the Companies, should follow this movement, especially since the Fed should stop buying the US Treasury bills, which have allowed it for years to keep long-term rates at a low level.
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