The American central bank is preparing to raise its key rates, to fight once morest inflation, but two camps clash within the institution: those who want to act quickly and plead for a sharp increase, once morest supporters of a more moderate first increase.
“Personally, I don’t see any compelling case for going strong in the beginning,” New York Fed President John Williams told reporters on the sidelines of an online conference at the University of New Jersey on Friday. City.
Faced with inflation at its highest in 40 years, the debate is no longer whether or not the powerful Federal Reserve will start raising its rates in March, but by how much: 25 or 50 basis points (i.e. 0, 25 or 0.50 percentage points).
“I don’t think we need to go very fast at the start,” said John Williams, who later preferred, depending on how the situation evolved, “to slow down or speed up”. Other officials disagree, including James Bullard, chairman of the Fed’s St. Louis branch, who is advocating for rates to be hiked a total of 100 basis points in the three scheduled meetings of the Fed. the Fed by July 1.
This implies at least a 50 point increase. “We were surprised by the high inflation. (…) Our credibility is at stake here,” he said on Monday. He had highlighted the need to “react to the figures”, but “in an organized way and without disrupting the markets”.
“I think my position is good and I will try to convince my colleagues that it is good,” he added, before reiterating on Thursday his fears of seeing inflation “out of control”. It was in May 2000 that the Fed had, for the last time, resorted to a hike of 50 basis points.
The world’s largest economy has recovered from the damage caused by the Covid-19 pandemic. But it is now threatened by a danger it had not seen for 40 years: excessive inflation. The rise in prices reached 5.8% in 2021, according to the PCE index which is favored by the Fed, its highest rate since 1982, and above all well above the 2% in the long term that the monetary institution aims for.
Core inflation, which excludes volatile energy and food prices, came in at 4.9%. Raising key interest rates lowers inflation by raising the cost of credit, which slows demand from consumers and businesses.
Rates have been in a range of 0 to 0.25% for nearly two years. They had been abruptly lowered in March 2020, in the face of the imminence in the United States of the threat linked to Covid19. John Williams is bullish on a slowdown in inflation, and expects that, by the end of 2022, “PCE price inflation will return to around 3%, before falling further next year as supply issues will continue to ease.”
He also expects “GDP growth of just under 3% this year” and an unemployment rate “around 3.5%” at the end of 2022. When rates have started to rise, “the next step will consist in starting the process of reducing (…) our holdings of Treasury bonds and MBS (financial products backed by mortgages, editor’s note)”, he underlined. In other words, start to reduce the balance sheet of the Fed, inflated by two years of asset purchases.
“Assuming the economy develops roughly as expected, I expect this process to begin later this year,” Williams said.
