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Washington (AFP) – The US Federal Reserve faces a decisive entitlement, Wednesday, as it must increase its main interest rates to combat inflation, two years following reducing them to zero to combat the consequences of Covid-19, at a time when the economic prospects are once once more surrounded by uncertainty due to the war in Ukraine.
The goal of the US central bank’s move is to force commercial banks to impose higher interest rates on loans granted to their customers in an effort to slow consumption, and thus relieve pressure on prices, especially in light of expectations that supply problems will continue for months.
With inflation reaching its highest level since 1982, the Federal Reserve, which will hold its meeting on monetary policy on Tuesday and Wednesday, will seek to unleash this dynamic.
Reserve Chairman Jerome Powell recently expressed confidence in the institution’s ability to ensure a “soft landing” of the economy that would allow “inflation to be controlled without causing deflation.”
However, the reserve will have to move with caution in this extremely sensitive issue.
“The coincidence of higher inflation and slower growth presents a dilemma for the Federal Reserve,” Wells Fargo economists said in a note.
They are likely to give priority to slowing inflation, especially since it “gained more credibility during the past decades as a guardian of price stability.”
Experts expect six interest rate increases of a quarter of a percentage point (0.25%) in 2022.
Anticipate a “soft landing”
The administration of President Joe Biden believes that the ball is now in the Federal Reserve’s court, and Treasury Secretary Janet Yellen considered it “appropriate” for the central bank to move, stressing Thursday in statements to “CNBC” that it is also waiting for a “soft landing.”
The main interest rates since March 2020 have ranged within a low margin between zero and 0.25%, and the Federal Reserve usually increases them in stages from 0.25 percentage points, but the hypothesis of a larger increase of 0.50 points appeared at a possible time.
However, Jerome Powell was very clear during a congressional hearing in early March, saying, “I am inclined to propose and support a 25 basis point increase in interest rates.”
No one in the market expects an increase of half a point, but almost everyone (95.9% of customers) favor only a quarter of a point, while others expect to keep interest rates at their current level, according to what was shown by the evaluation of futures products issued by the “CME Group” market. “.
In Europe, where inflation is less high, the European Central Bank decided Thursday to keep its interest rates at the current level, which is the lowest in history.
ghost of the seventies
The annual inflation rate in the United States rose to 7.9% in February, according to the Consumer Price Index issued by the Department of Commerce, and the war in Ukraine caused an additional increase in gasoline and food prices. The Federal Reserve adopts another indicator, the personal consumption expenditures price index, which recorded an annual increase of +6.1% in January.
All of this raises fears of a repeat of the inflation crisis, which exceeded 10% in the seventies and early eighties, when the Federal Reserve increased its interest rates by up to 20%, which allowed to slow down the rise in prices, but plunged the country into an economic downturn.
Wells Fargo economists stated that “the seventies, when Fed policymakers had to orchestrate a painful deflation… remain engraved in the Fed’s memory.”
The economist at Grant Thornton expressed her “concern regarding an increase in inflation expectations and the entry into a more dangerous wage/price spiral,” at a time when a shortage of labor is already causing an increase in wages.
But she added, “(We haven’t reached this stage yet, and the Federal Reserve, like other central banks, pledged to avoid a repeat of the 1970s.”
The US job market is now showing great resilience, with the unemployment rate falling in February to 3.8 percent.
The Federal Reserve is also expected to consider the appropriate timing to begin reducing the quantitative easing program by phasing out billions of dollars of Treasury bonds and other assets it has purchased since March 2020 in order to support the economy.
© 2022 AFP
