The day at a glance | May 13, 2022

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*Powell affirmed that 50bp increases are very likely to be carried out in June and July.

*Economists are divided regarding interest rate cuts in China; the central bank will have a meeting on Monday.

*Industrial production in Europe decreased (-) 1.8% during March (-0.8% annual).

*Expectations of higher rates increased in Japan despite contrary messages from the central bank.

*Chinese real estate developers` debt problems worsened as sales dropped and the Yuan weakened.

*Central Bank of Mexico increased rates in 50bp to 7%; it considered more aggressive increases for inflation to converge to its target level.

Economic environment

Powell reaffirms aggressive monetary normalization. In a radio interview program, Chair of the Federal Reserve Jerome Powell confirmed that it`s very likely that 50bp increases will be carried out in the bank`s next two meetings (June & July). Moreover, Powell remained open to doing more as the FED is determined to contain inflation. “If things come in better than we expect, then we`re prepared to do less. If they come in worse than we expected, then we`re prepared to do more”, said Powell. Contrary to previous comments, Powell said that the FED`s ability to implement more of an aggressive monetary normalization (or even monetary restriction) without causing a recession, it would ultimately depend on factors that are out of the central bank`s control (like production chain issues or the geopolitical conflict). This suggests that it will be complicated for such aggressive interest rate increases not to have negative effects on growth. Previously, Powell had assured that the US economy was strong enough to withstand the monetary adjustment, but he is not as convinced anymore. Powell even affirmed that the process could be “painful”. Lastly, concerning the question of whether the FED made a mistake by not carrying out the monetary adjustment before March at a more gradual pace, Powell said that, in retrospect, perhaps it would have been better to carry out interest rate increases sooners. “I`m not sure how much difference it would have made, but we have to make decisions in real time, based on what we know then, and we did the best we could”, Powell said.

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