Note: This text is a translation from the original language, German.
The Fed raises interest rates by 0.75% and tries to combat the significantly increased inflation with the largest interest rate hike since 1994. The irony of this panic move is that just last year, the Fed was talking about a temporary higher inflation, and ECB President Lagarde still believes that inflation will return to 2%. Inflation will not resolve itself; it did not arise due to the war in Ukraine, supply chain problems, or increased commodity prices, but rather due to the excessive money printing by central banks and their zero-interest rate policies over the past 20 years.
Back to the 1970s?
In recent decades, we have been living far beyond our means and financing our needs with free money, which will eventually have to be repaid through a currency reform or higher inflation. The current situation strongly resembles the late 1970s, and there is already discussion about whether Powell can be the new Paul Volcker, who raised interest rates from 5% to nearly 20% in the late 1970s to curb inflation. Ultimately, real interest rates are the decisive factor. Currently, the Fed would need to raise interest rates to at least 9% to enable positive real interest rates and combat inflation, as Volcker did. You can imagine the impact of 9% interest rates on the real estate market or the refinancing of globally indebted countries. The likelihood is high that the Fed will eventually back down and keep interest rates well below the inflation rate.