The interest rate in the US

Good morning dear readers,

when the entire global capital market is hanging on one man’s every word, the Federal Reserve Bank (Fed) announces its new interest rate. This is what happened yesterday, late in the evening German time, when Fed Chair Jerome Powell announced that the US Federal Reserve would raise its key benchmark by a quarter of a percentage point. The key interest rate is now in a range of 4.75 to 5.0 percent. Just over a year ago it was still close to zero.
The drama in Washington was particularly poignant because past rate hikes had wreaked havoc on some regional US banks. The bankruptcy of California’s Silicon Valley Bank would probably not have happened in this form without the turnaround in interest rates.

The Fed finds itself in a classic conflict of goals that is getting worse and worse. On the one hand, their behavior should not cause difficulties for the banks and the capital market. But on the other hand, the primary goal of the central bank is to maintain monetary stability. In the end, the latter determined the current decision, because inflation was recently higher than initially expected. The markets, however, were skeptical about the move: Wall Street closed in the red after the Fed’s decision.

At the same time, Fed Chairman Powell announced stricter supervision and regulation of banks. The sudden bank run on Silicon Valley Bank that eventually triggered its collapse was made possible by online and mobile banking. The Fed therefore believes that regulation should also be adjusted accordingly.

In Germany, too, inflation is currently a problem that is having a major impact on economic development. Economic experts announced yesterday that they only expect growth of 0.2 percent for 2023. This puts Germany further behind in an international comparison. But even this gloomy forecast could be overly optimistic, as it was made before the turbulence in the banking market. The problems there could cloud future prospects again.

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Germany was once considered a striving country among the economic nations. But now the former class leader has slipped significantly. Only in five G20 countries are the growth prospects worse than in Germany in the next two years – including special cases such as Russia or Turkey.

The economist Veronika Grimm also sees politics as responsible for the economic weakness. In the Handelsblatt interview, she gave three examples of anti-growth decisions:

  • the skimming of chance profits
  • the discussions about market rules on the energy markets
  • the planned de facto ban on the installation of oil and gas heating systems from 2024

You can find the complete interview here.

In view of this deterioration, Handelsblatt economics expert Julian Olk is calling for a “new German business model”. To do this, the country must, firstly, get rid of the fact that industry is the measure of all things and, secondly, increase the workforce by any means necessary. It hurts, says Olk, but: “Unlike religious miracles, an economic miracle requires action. It’s not enough just to believe in it.”

Do you remember “Dieselgate”? Back then, in 2015, various car manufacturers were exposed with their manipulation scam to circumvent legal limits for car emissions with the help of a secretly installed defeat device. Now the manufacturers would like to close the bonnet on the unloved topic, but it is far from over.

First, the European Court of Justice ruled in favor of a diesel owner in a dispute with Mercedes-Benz on Tuesday. According to this, the car manufacturer has to pay a customer compensation because the illegal defeat device is installed in his vehicle. The judgment is considered trend-setting and could make lawsuits against the car manufacturers more promising.

Second, according to a report by the International Council on Clean Transportation Europe, 77 percent of diesel models have with the emission standards Euro 5, 6b and 6c suspiciously high nitrogen oxide emissions. These include the Opel Insignia, the Nissan Qashqai and the Skoda Octavia. According to the study, the values ​​for around 150 models are so high that the vehicles “almost certainly have a prohibited defeat device”.

The sudden end of low interest rates, coupled with the gloomy economic prospects, has led to the technology industry being viewed much more soberly than in the previous boom phase. Therefore, investors who earn their money by investing in young technology companies are now threatened with a painful turning point.

After the valuations of start-ups have been rising for years, the current financial crisis threatens to make significant adjustments. Tiger Global Management, a New York-based venture capitalist, downgraded its investments by 33 percent last year. That equates to a $23 billion loss in value. According to expert estimates, Tiger Global may not be the only venture capitalist with such a drop in value on its books.

Boris Johnson: The former British Prime Minister had to face cross-examination in Parliament.

Finally, a look at Britain, where former Prime Minister Boris Johnson was cross-examined for more than four hours in front of cameras yesterday about his corona parties. Specifically, it’s about farewell, Christmas and birthday parties during the pandemic, where the rules of distance were not observed while the rest of the country remained in strict lockdown.

Despite the hype, Johnson remained true to himself and was aggressive during the interrogation. In the worst case, the celebration could cost him his political career. It is to be hoped for him and his guests that the fetes were the parties of the century. If the host of a party loses his position as Prime Minister and still says “It was worth it!” then it must have been a very good party.

Have a good day of legal hilarity.

Best regards
Her

Teresa Stiens
Editor of the Handelsblatt

Morning Briefing: Alexa

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