Inflation has started to decline in the United States, but the work of the American central bank (Fed) is far from over, assured its president on Wednesday, while the institution has just raised its rates by a quarter points and is considering further increases.
The Fed raised its key interest rate for the eighth straight time on Wednesday, but slowed the pace from previous hikes.
This first meeting of the year marks a return to the more usual quarter-point rhythm. But additional increases are to be expected, the institution said.
“We are talking regarding a few more rate hikes to get to the level that we think is sufficiently restrictive,” said the institution’s president, Jerome Powell, during his press conference.
Because if the situation improves in terms of inflation, it is too early to claim victory.
We are seeing “the start of disinflation”, said the Fed Chairman, but “inflation remains high”, and the tightening of monetary policy takes time to fully take effect.
Thus, “although recent developments are encouraging, we will need more evidence to be convinced that inflation is slowing down sustainably,” he stressed.
Possible to avoid recession
Moreover, rates, which are now in a range of 4.50% to 4.75%, should remain at a high level for a while, to continue to dampen economic activity and contain the rise in prices.
If the US economy slows and inflation comes down “slowly” as expected, it will “not be appropriate to cut rates this year or to ease monetary policy,” Jerome Powell also said.
In addition, the Fed is continuing to reduce its balance sheet, a movement that began in June, following having, during the COVID-19 pandemic, bought securities to flood the market with liquidity and allow it to continue to operate.
The Fed’s monetary policy committee, the FOMC, also, in the press release published following its meeting, noted that “recent indicators show moderate growth in spending and production”.
The purpose of rate hikes, in effect, is to induce banks to raise interest rates on loans to households and businesses in order to slow consumption and thus prevent prices from continuing their dizzying escalation.
But with consumption driving the US economy, too much tightening might lead to a recession.
Jerome Powell considers it possible to “return to 2% inflation without a really big slowdown or a really big increase in unemployment”. But unemployment, currently at 3.5%, might however rise to almost 5%. “It is quite possible,” he also stressed.
Solid labor market
The state of the labor market is being watched closely by the Fed, following two years of labor shortages that drove up wages, in the midst of high inflation.
Official employment figures for January will be released on Friday. The unemployment rate might rise a little, to 3.6%, a level however still among the lowest of the last 50 years. The number of jobs created is expected to slow down to 187,000 once morest 235,000 in December, according to the consensus of Briefing.com.
A data, published Tuesday by the Department of Labor, seemed to have persuaded economists that inflation was now on the right track: the average cost of an employee, which experienced a less marked increase in the fourth quarter than those of previous quarters.
The rise in consumer prices thus fell in December to 5.0% over one year, once morest 5.5% the previous month, according to the PCE index, favored by the Fed, which wants to bring it back to around 2%.
Another measure of inflation, the CPI index, according to which pensions are indexed, also showed a sharp slowdown in December, to 6.5% over one year once morest 7.1%.
On Thursday, the European Central Bank will meet. The European institution started later than the Fed to raise its rates, and should raise them once more, and even hint at further hikes.
