Daily Brief: When The Fed Says “Hike”, We Say “How High?”

Daily Brief: When The Fed Says “Hike”, We Say “How High?”

over 1 year ago3 mins

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The Federal Reserve (the Fed) delivered its expected 0.75 percentage point hike and warned there’d be more big increases to come.

What does this mean?

After August’s dismal inflation report, there was never any doubt that the Fed would jack up rates – but the announcement itself was just a warm-up for the main event: the Fed’s long-term rate projections. A lot has changed since the last update in June, and the Fed’s “dot plot” (forecast of future rates) now points to peak rates of 4.6% in 2023 and no falls till 2024 – sparking an initial selloff by investors who hoped for a lower peak and earlier cuts.

Fed hikes rates
Source: The Wall Street Journal

Why should I care?

For markets: Read my lips.

“Fed Watchers” try to predict future rate decisions by picking apart Federal Reserve statements. It’s a tricky business – and there are more reliable ways of guessing at the Fed’s next play. “Credit spreads” are one: they’re a measure of how expensive it is for companies to borrow – and the fact they’ve jumped 70% over the last year for firms with strong credit ratings suggests that companies are feeling the interest-rate pinch. The Fed will be watching signs like this for indications of debt-related stress: if corporate borrowing costs spiral, they just might ease up on hikes a little.

US stocks slide

The bigger picture: The Fed’s tightrope walk.

As the Fed’s been raising rates, the US yield curve’s drooped like a sunflower in late fall: in other words, it’s inverted, a pretty reliable sign that a recession’s looming. How painful that recession is depends on two key things: how long inflation sticks around and how high rates have to go to conquer it. See, if the Fed raises too slowly, inflation will continue, creating bigger problems down the line. But go too fast, and it risks triggering a drawn-out recession. No wonder the world’s watching the Fed so closely.

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Germany's Nationalizing An Energy Giant... For $29 Billion

Uniper image

Germany’s poised to nationalize utility firm Uniper, once Europe’s biggest importer of Russian gas.

What does this mean?

Germany’s energy sector is struggling – and the cost of sustaining it is (h)eating the German taxpayer out of house and home. Back in July, the government agreed to a €15 billion ($15 billion) rescue package for Uniper, a firm it says is of “paramount importance” to the country’s economy. But as the energy crisis has deepened, the damage to Uniper has spread – and now, nine weeks later, the company finds itself on the cusp of full-blown nationalization. This new deal will see Finnish energy firm Fortum sell its stake – a real thorn in its side – to the German government, bringing the total Uniper bailout bill to €29 billion ($29 billion).

Uniper under strain

Why should I care?

Zooming in: This ain't our first (or last) rodeo.

Seasoned investors who served in the trenches during the global financial crisis might be feeling a sense of déjà vu right now: after all, the spectacle of once-mighty institutions withering into public ownership or running into the arms of competitors has a distinct late-noughties flavor to it. Back then, it was banks and other financial institutions that were considered “too big to fail” – but today’s suppliers of vital energy to companies and homes might arguably deserve that label too. Watch this space, then: Uniper’s nationalization could be a sign of more to come.

The bigger picture: There might be a slim silver lining.

As bailout bills mount, governments will be asking themselves one key question: “How do we stop this happening again?” The likely answer: reliable, home-grown, renewable energy. In the past, critics of this approach liked to tout the cost of ditching fossil fuels – but the current energy crisis has made the cost of depending on them all too obvious too. So if there’s any silver lining to this predicament, it could be that it’s pushing western countries to speed up their transition to renewable sources of energy.

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