The World Is Raising Rates Again, Except in One Middle Eastern Country
This week on episode 383 of Calcalist’s Money Engines podcast, with economist and chief strategist at Agam Leaders Uri Greenfeld: for the full episode on Spotify, for the full episode on YouTube
While inflation in Israel is on a downward trend and expectations are for continued moderation, the rest of the world is moving in the opposite direction. In the United States, annual inflation rose to 4.2%, with a monthly increase of 0.5% in May. The main factor is energy prices, with gasoline prices at U.S. stations now 40% higher than a year ago, and food prices up 3.1% over the past year. Even when those volatile items are excluded, core inflation stands at 2.9%, slightly below forecasts, but still far from the 2% target.
The question troubling the Federal Reserve ahead of next week’s interest-rate decision is not the current level of inflation, but whether the jump in oil prices will become persistent inflation. The market assumes that the crisis in the Middle East will eventually ease, but at a new, higher price level. The producer price index, which jumped 6% last month, only heightens concerns that the pressure will pass through to consumers.
Against this backdrop, the U.S. central bank is convening for the first interest-rate decision of the new chairman, Kevin Warsh. Contrary to what might be expected from someone appointed to cut rates, he may instead be required to curb pressure to raise them. At the same time, the European Central Bank also raised rates today for the first time in three years. The conclusion is clear, the global trend has reversed. After years in which the fear was deflation and central banks stepped in to support the economy, the old threat, inflation, is back at the top of the agenda, and Israel remains a rare exception in this landscape.
At the start of the episode, we discussed Bank of Israel foreign exchange reserves, which have climbed to nearly $240 billion, among the highest in the world as a share of GDP, far above the International Monetary Fund’s reference threshold. In May, the Bank of Israel carried out an unusual move and bought about $800 million, a foreign-exchange intervention that was barely felt in trading, unlike in the past, when dollar jumps and headlines about intervention were immediate. Enjoy listening!
Episode segments by topic: 3:01 - Bank of Israel foreign exchange reserves, what is their role and why did we reach nearly $240 billion 9:25 - The unusual foreign-exchange intervention in May, how it worked and why we did not feel it this time 22:00 - The sovereign wealth fund and why the Bank of Israel does not “save” the high-tech sector 25:25 - Global inflation, core inflation and the Fed’s interest-rate decision 39:44 - The escapism segment
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