• The US Fed has decided to take a more aggressive stance in its monetary policy, but not everyone is happy about its moves. The Fed first decided to raise rates as part of its restrictive measures against inflation and according to Wednesday’s minutes of March, we will probably see a reduction of the balance sheet by up to $95 billion starting from May.
• However, the Fed has been late in both reducing the balance sheet and raising rates and ultimately is now trying to chase inflation that might be already out of control. Today’s inflation is not solely the fault of the Fed, as government fiscal policy, broken supply chains during the pandemic, and the current conflict in Ukraine have all had an impact. But the Fed could have intervened much earlier, as it has several times in the past. However, concerns about prolonged slow growth eventually led to the zero interest rate policy extension.
• The problem is that when the conflict in Russia and Ukraine has rapidly increased energy prices and the US economy is showing signs of a possible impending recession, raising rates too quickly may be another central bank misstep. Moreover, given the sustained low rates in recent years, debt levels in the economy are much higher than usual, and rates of around 5% or more would harm the entire US economy.
• A closely watched event in Europe was the presidential election in France, where there was ultimately no big surprise. The incumbent President, Emmanuel Macron, defeated the leader of the far-right National Assembly party, Marine Le Pen, by a few percentage points in the first round, and both will now go through to the second round. However, unlike in 2017, the second round results, which will take place in two weeks, could be much closer. A possible, though unlikely, victory for LePenn could then be a significant problem for France and Europe as a whole.

What to watch out for this week

• Investors can look forward to the start of earnings season next week. Among the interesting titles will be big banks like JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup and Wells Fargo. Given that the banks have lagged the S&P 500 index quite significantly since the beginning of the year, it will be interesting to see if they can live up to analysts’ expectations.
• Inflation figures will be important. February’s consumer price index reading of 7.9% was the largest annual increase in 40 years, and the March numbers released this week calculate an 8.5% rise in CPI due to rising commodity prices. A strong inflation reading will mean expectations of a more aggressive Fed approach to rate hikes, which may act as a drag on the economy.
• Later in the week, data on producer price inflation will be published on Wednesday, the latest figures on initial jobless claims are due for release on Thursday, along with data on retail sales and consumer sentiment.
• Fed Governor Michelle Bowman, Fed Governor Christopher Waller, Atlanta Fed President Raphael Bostic and Chicago Fed President Charles Evans will be speaking Monday, Fed Governor Lael Brainard and Richmond Fed President Tom Barkin are to deliver remarks at events on Tuesday, while Cleveland Fed President Loretta Mester and Philadelphia Fed President Patrick Harker are to speak on Thursday.
• On Thursday, the ECB is to hold its latest policy-setting meeting. Inflation is at a record high 7.5%, but policymakers are reluctant to tighten policy amid uncertainty over the impact of the war in Ukraine on the bloc’s economy. However, analysts expect the ECB to raise rates this year, given that inflation is still showing no signs of peaking and voices of a more hawkish approach at the ECB are growing louder.