Opinion – Helio Beltrão: Fed woke up late and is late

The world’s stock markets have been plummeting since the US central bank’s decision last week to raise interest rates by 0.5 percentage point. Fixed-income securities (bonds) in dollars also fall.

Unusually, having cash on hand has become attractive at the moment, despite corrosive dollar inflation of 8% a year. In several columns over the past year, I’ve demonstrated how the US central bank sponsored protracted inflation and an asset bubble through an unprecedented monetary injection.

Now the Fed appears to have woken up, but it is hopelessly behind schedule. It will need to raise interest rates a lot, up to at least 4%, if it wants to maintain any credibility in controlling inflation. Unlike Paul Volcker in 1981, this Fed does not appear to be courageous or aware of the failure of its perpetual monetary easing experiment.

The current president, Jay Powell, assured in 2021 that the rise in prices was temporary and therefore vowed to keep interest rates at zero until 2024. Until last week, investors seemed to believe. His greatest certainty was that we would continue in the bizarre world of the last 15 years, in which the Fed continually boosts the stock market and other risky assets, despite the unprecedented combination of factors: a) low growth, b) disruption of supply chains, c) rampant inflation and d) risk of world war.

Now it’s sinking in that the Fed will even remove the tray of financial heroin that fueled the rave of markets for so long. The illusion of wealth — stocks and high-risk assets — was and will be exposed as a delusion. And it could just be the beginning of a meltdown. After all, the Stock Exchange goes up by stairs and down by elevator.

Market aces, who thought they understood the frill, are scared and “swimming naked”, as Warren Buffett says. Managers such as Ark Innovation’s Cathie Wood and Tiger Fund’s Chase Coleman have lost more than two-thirds of their investors’ funds. From their highest point, tech stocks have melted: Meta/Facebook (50% down), Amazon (42%), Mercado Livre (60%), Nu Holdings/Nubank (62%). The market as a whole has already fallen by almost 30%, according to the Russell 2000 index, a benchmark for the US economy. Austrians already knew.

The Fed, its usual guarantor, has a leaky boat and wants to save itself first. Powell, one of the worst commanders the bank has ever had, doesn’t seem to want to go down in history as the guy who buried the Fed’s dying credibility once and for all. That’s why he raised interest rates.

However, they are still far below inflation. According to a solid metric, snubbed after the 2008 crisis — the Taylor rule — Fed interest rates should be above 9% a year, down from less than 1% now.

The eurozone is in even worse shape. There, interest rates have been negative since 2014, and inflation scares the continent. Joachim Nagel, president of the Bundesbank, calls for an increase in ECB rates starting in July, but nothing has been decided. Here in Brazil, at least in this aspect, we are less bad: the BC has already raised rates above inflation, and the stock exchange has been with depressed prices since 2016.

Many investors believe (or want to believe) that if the stock markets continue to fall, the Fed will again bail out the market, reducing interest rates and injecting money. In fact, that’s what it has done for the past 40 years. It turns out that now is different: there is high inflation, which erodes purchasing power and negatively affects the popularity of politicians.

Investors, therefore, must prepare for the scenario in which dollar interest rates will continue to rise for a long time. A new fall in risky assets, especially those that have risen the most in recent years, is far from being ruled out.