Jerome Powell is turning off the money supply.

Everyone had expected it, the American central bankers of the Federal Reserve (Fed) had let the corresponding announcement.

The only uncertainty was how jerkily Powell turned the faucet.

Raising interest rates by 50 basis points was the biggest move in more than 20 years.

However, high inflation of 8.5 percent in March led some to assume that the Fed would raise interest rates by an unprecedented 75 basis points.

There was relief on Wednesday when Powell announced the less drastic increase.

The US stock indices jumped 3 percent.

It is still possible to invest, inflation would still eat up everything that is not in tangible assets - at least that is the first thought.

Gregory Bruner

Editor in Business.

  • Follow I follow

After being allowed to catch their breath on Wednesday, stock markets soon dived again on Thursday.

In Germany, too, the Dax opened 2.2 percent higher.

However, as the opening bell on Wall Street approached, gains melted and eventually turned negative.

When the "Daxe" in Germany was already asleep, the American indices fell even further.

The Dow Jones fell more than 3 percent, while the tech-heavy Nasdaq fell 5 percent.

Germany went down further on Friday, albeit not to the same extent.

The message from investors: "We don't trust the Fed's roast."

If inflation stays high

Powell on Wednesday rejected a 75 basis point hike in key interest rates at the upcoming Fed meetings.

But what happens if inflation stays permanently high?

The US Bureau of Labor Statistics will release its inflation report for April next week.

How reliable Powell's statements are will sometimes be decided by them.

Bond traders are also unconvinced by the current monetary policy stance.

Bond yields rise when their prices fall, which means they become cheaper.

As a result, investors tended to sell their government bonds rather than buy them.

At the beginning of the week, ten-year German government bonds yielded 0.9395 percent.

On Friday it reached 1.09 percent, its highest level since 2014. Two-year government bonds were still at 0.255 percent on Monday.

By Friday they had risen to 0.330 percent.

The American counterparts showed some similar movements.

Ten-year US Treasuries started the week at a yield of 2.928 percent and hit a cyclical high of 3.102 percent on Thursday.

Bonds with a maturity of two years stayed around the level of 2 on a weekly basis,

73 percent.

On Wednesday, their yield had risen to 2.83 percent.

After the interest rate decision, it collapsed to 2.62 percent, but then rose again.

Bond sales are a mystery

Unicredit analysts were puzzled by the sell-off as it was at odds with the Fed's perceived more dovish stance.

"What is particularly surprising is that the sharp rise in yields was not accompanied by a corresponding increase in interest rate expectations, which was also reflected in the sharp steepening of government bond yield curves," they wrote in a comment on Friday.

They suspect that the reason for this is, among other things, the labor market data from the United States, which, alongside inflation, is an important part of the basis for the Fed's decisions.

The development of wages is viewed with concern.

If they rise, this increases the inflationary pressure again.

Developments in the United States are also highlighting the decisions of other central banks.

The Bank of England raised interest rates from 0.75% to 1% on Thursday.

The big question mark is and remains the European Central Bank (ECB).

While analysts at the beginning of the year were still assuming that interest rates would not rise until next year, their eyes are now turning to the ECB meeting in July.

The end of the bond purchases seems sealed, if you believe the words of some ECB Governing Council members.

It is still unclear how fast and how large the rate hikes will be, should they happen.

The example of the Fed shows that it will be difficult to please the markets in any case.

On the other hand, it should be obvious that doing nothing is not a solution.

If the ECB does not live up to what many of its Council members are now talking about, it will risk its credibility and thus its promise of stability.

And nothing scares the markets as much as a lack of predictability.