© Archyde.com/Jonathan Ernst
FILE PHOTO: Facade of the Federal Reserve in Washington DC
Por Howard Schneider
WASHINGTON, March 14 (Archyde.com) – In the now seemingly simpler days of last December, when there was only one pandemic to worry regarding, the leaders of the U.S. Federal Reserve were all betting on the idea that they might control inflation with modest increases in interest rates while the economy and labor market prospered.
Now, the war in Europe has added to the health crisis, and when the US central bank’s monetary policymakers meet this week they will have to decide how much that rosy outlook has soured, and whether their hopes for a ” economic soft landing” have diminished or have vanished altogether.
The Federal Reserve is almost certain to raise its overnight benchmark interest rate by a quarter of a percentage point at the end of its two-day policy meeting from Tuesday to Wednesday. More important will be projections showing how far US policymakers think they will have to raise rates this year and in 2023 and 2024 to rein in inflation that has outpaced their expectations.
If your outlook for the fed funds rate is above what is considered a neutral level of around 2.50%, it means that the mood of the Federal Open Market Committee (FOMC) has changed. changed, and that its members see the need to finally slow down the economy – and run a greater risk of recession – in order to control rising prices. In December, most Fed policymakers expected that the interest rate would only need to rise to 2.10% by the end of 2024.
“There is no doubt that the FOMC will start raising rates (…). What everyone wants to know is what the Fed will do next,” wrote Roberto Perli and other Piper Sandler analysts. If the new projections show the fed funds rate target rising above 2.50% in the coming years, it would be “a sign that most of the FOMC is so concerned regarding inflation that it doesn’t mind risking a recession to bring it down quickly. Needless to say, that would be a very flattering fact.”
GO BACKWARDS
The Fed is scheduled to release its new monetary policy statement and updated quarterly economic projections at 2:00 p.m. EDT (1800 GMT) on Wednesday. Fed Chairman Jerome Powell will give a press conference half an hour later.
On Friday followingnoon, investors were expecting Fed rate hikes to peak just below neutral, so a move higher might trigger something of a shock – perhaps even leading to a “reversal” of bond yields, with short-term rates outperforming longer-term ones.
It will be arguably the central bank’s most consequential moment since the spring of 2020, when policymakers promised open support for a pandemic-hit economy, slashing the fed funds rate to near zero and initiating massive buying of bonds. Rising unemployment was then the main concern, and the Fed pledged to do whatever was necessary to maintain the financial stability of households and businesses during the crisis.
Now, unemployment has plummeted to 3.8%, a low level in historical terms, and households have pockets full of money thanks to US government aid programs related to the pandemic.
Inflation, which triples the Fed’s 2% target and has become a hot political issue, has emerged as the number one threat, not only challenging the Fed’s ability to formulate policy, but raising the specter of a situation similar to the 1970s, in which the central bank had to impose a punitive recession to control prices.
This week, the Fed will not only end its pandemic emergency measures, but will have to guide the public through the maze of competing economic and geopolitical considerations, and argue why it can avoid ending the current economic expansion. .
Fed rate hike cycles are often accompanied by their own guidance, with words like “measured” or “gradual” sprinkled throughout policy statements to convey the anticipated pace of rate hikes. Recently, Powell has used less concrete terms such as “agile” for monetary policy that is expected to include steady rate hikes this year, but may have to be speeded up or slowed down in response to rapidly changing events and conditions.
“Neither data nor fortune has favored the Fed” in recent weeks, wrote Tim Duy, chief US economist at SGH Macro Advisors.
INFLECTION POINT
The list of problems facing currency leaders deliberating this week has gotten really long.
Since the last monetary policy meeting in late January, inflation has shown no clear signs of slowing, further moving the Fed’s current stance away from a growing economy. Long-term inflation expectations, which are of particular concern to the central bank as a sign that it is losing public confidence in its ability to contain prices, have also started to rise.
The war in Ukraine has no clear resolution and might further fuel inflation through rising energy costs, further disruption to supply chains, or even a reshuffling of global trade and governance that might mean persistently higher prices.
On the opposite side, there are signs of an easing of the pandemic that might fuel a strong recovery. Data released earlier this month showed a sharp rise in job growth in February that beat expectations and upward revisions for January and December. A pause in wage increases last month eased fears that workers’ pay and prices will begin to push each other up.
Household savings remained elevated through 2021, recent Fed data showed, providing a savings cushion to help Americans absorb the costs of more expensive gasoline and food without cutting other areas of spending.
Powell, testifying before Congress earlier this month, made it clear that his focus is on inflation and that he was willing to raise interest rates and in larger half-percentage-point increments if price rises are not met. braked
But he also acknowledged that the world has become more complicated, in ways that may take time to understand.
The war in Ukraine “is a turning point and it will be with us for a long time,” Powell told the House Financial Services Committee on March 2. “There are events that are yet to come … and we don’t know what the real effect will be on the US economy. We don’t know if those effects will be long enough or not.”
(Reporting by Howard Schneider; editing by Dan Burns and Paul Simao: translated by José Muñoz in the Gdansk newsroom)