Fed hikes interest rates again, but Europe and UK are even worse

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Another day, another interest rate hike from the Federal Reserve. What’s new?

It’s safe to say that the daddy of all bull runs, roaring since the Great Financial Crisis of 2008, is now over.

How high will interest rates go?

The market is wobbling as the Federal Reserve hikes interest rates to attack inflation. This sucks liquidity out of the economy, as investment is reduced and the free-wheeling consumption of the last decade is restrained. It also, however, kicks up mortgage rates.

With six interest rate hikes in a row, it is the sharpest rise in rates since the 80’s. Back then, they touched nearly 20%, at a time when inflation roared even louder than it is today. That is a far cry from today, when rates are between 3.75% and 4%. They are expected to rise towards 4.5% by the end of the year.

Mortgage Rates

This all has an effect on mortgage rates, of course. While the Fed rate is short-term, the average rate on a 30-year fixed rate mortgage in the US surpassed 7% this week, as reported by mortgage buyer Freddie Mac.

That’s an astonishing jump from the 3.14% number it was at just one year ago. Housing sales are beginning to slow, yet the job market and consumer demand has not been impactfully dented by the Fed’s actions.

While this sounds good on the surface of things, it prevents inflation coming down, with Fed policymakers acknowledging that inflation has been more persistent than originally thought, while adding that “the ultimate level of interest rates will be higher than previously expected”.

That’s pretty obvious to anyone, mind you, with inflation trading close to 40-year highs a year after “transitory” was the buzzword at every press conference.

Europe and UK

The Federal Reserve lead the pack, however. The UK is meeting this afternoon to announce what is expected to be a healthy hike in rates, as it continues to reel from the damage caused by Truss’ tumultuous reign (cameo?). Inflation was 10.1% in September, while the pound has been getting crushed in the FX markets.

Europe is also staring a recession squarely in the face. The European Central Bank (ECB) delivered a second consecutive jumbo hike last week – at 75 bps – and has now raised rates by 2% in the last three meetings, taking them to the highest number since 2009.

A reminder that however bad things are in the US, they are worse across the Atlantic. Although people are hurting everywhere as inflation refuses to die without a fight, rendering all those who brandished it as “transitory” highly mistaken.

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