The Open Market Committee supports increasing it with an inflation rate above 2% and a strong labor market
The US stock indices dominated the decline, following the “Federal” decision was issued regarding tightening monetary policy, and the indicators witnessed volatile movements, as they retreated at the close to lose the gains they made at the beginning of yesterday’s session while following up on the results of the companies’ business, but the Central Bank’s decision put pressure on the indicators.
Yesterday, the US Federal Reserve announced its willingness to raise basic interest rates in March for the first time since reducing it to zero with the outbreak of the Corona pandemic, pointing to high levels of inflation and the recovery of the labor market in the wake of mass layoffs that marked the beginning of the epidemic.
The decision announced by the Federal Open Market Committee, which is responsible for setting monetary policies, at the conclusion of a two-day meeting, did not bring many surprises, and was without any indications of the central bank’s willingness to take more severe measures than expected to address the wave of inflation that pushed consumer prices to the highest levels in decades of the year. the past.
“With inflation above 2% and a strong labor market, it will soon be appropriate to raise the target range for the federal funds rate,” the committee said, in a statement following the meeting, while Bank President Jerome Powell strongly hinted that the bank was ready to raise interest rates at its next meeting.
“I think the committee is considering raising the federal funds rate at the March meeting if conditions are right,” Powell added.
And on the impact of Powell’s announcement, Wall Street shares fell into negative territory yesterday, and the indicators witnessed volatile movements for the third consecutive day, as they fell at the close to lose the gains they made at the beginning of the session while following up on the results of the companies’ business, but the Central Bank’s decision put pressure on the indicators.
The Dow Jones Industrial Average decreased by 0.4 percent, or 129 points, at 34,168 thousand points, following rising by 500 points during trading.
The “S & P 500” index declined by 0.1 percent, or nearly six points, to 4,349 points, while the “Nasdaq” index rose by a marginal 0.02 percent, or three points, at 13,542 thousand points. And future contracts for US stocks fell yesterday, as the Dow Jones Industrial Average fell 1.24 percent (-421 points) to 33,634 points, and the broader “S & P 500” fell 1.44% (- 62 points) at 4279 points, in When “Nasdaq” fell 1.71 percent (-241 points) to 13,916 points.
And the main interest rates were reduced to remain between 0 and 0.25 percent, in March 2020, in the face of the Covid-19 pandemic to support the economy through consumption.
strong gains
Policy makers still expect price pressures to ease, considering that “progress in vaccines and easing supply constraints is expected to support continued gains in economic activity and jobs and lead to lower inflation,” however, they pointed to continuing risks posed by future variants of the virus.
After promising to keep interest rates low for longer to ensure that marginalized groups benefit from the economic recovery, the Federal Reserve moved quickly to stem the inflation that accelerated last year.
However, the FOMC statement said that “progress in vaccines and the easing of supply constraints” should lead to lower inflation.
slow down the order
The Federal Reserve cleared the atmosphere at its previous meeting in mid-December when it announced that it would end its bond-buying program earlier than expected, ie from March instead of June. He also stopped describing this inflation for the first time as “temporary”, even though it had reached a much higher level for months than the long-term target of 2 percent. Prices rose by 7 percent in 2021, at the fastest pace since 1982, according to the Consumer Price Index (CPI). But the Federal Reserve prefers another indicator of inflation, the Personal Consumption Expenditure Index (PCE), whose data for 2021 will be published on Friday.
It is assumed that raising interest rates according to daily estimates will allow to reduce inflation by slowing strong demand.
Federal funds rates determine the cost of money that banks lend to each other, so raising them makes credit more expensive. And if loans become more expensive, the consumption and investment of individuals and institutions becomes less, which would reduce demand and thus inflation.
The Federal Reserve has so far been cautious regarding increases, fearing that it would suddenly slow the economic recovery and with it the labor market.
But the country is now almost back to full employment and the unemployment rate in December fell to 3.9 percent, close to its pre-crisis level (3.5 percent) with a shortage of labor, putting employees in a position of strength to employers.
For his part, an official in the International Monetary Fund warned of more turmoil in financial markets, with the tendency of central banks around the world to tighten monetary policy to curb inflation.
Speaking to CNBC, Tobias Adrian, a financial advisor and director of monetary and capital markets at the IMF, said that the trend of central banks to tighten monetary policy might push stocks into a bear market even as monetary policy officials pledge to implement a smoother shift in their policy. . He added, “We may witness more tightening of financial conditions, and this means that risky assets such as stocks may witness a further decline,” explaining that the market’s reaction will depend on the ability of central banks to communicate their intentions.
He continued, “We expect in the event of an unexpected additional tightening of 50 basis points, that the stock markets will witness a significant additional selling,” stressing that some sectors will be more affected than others.
The IMF official considered that the turmoil might be transmitted to the cryptocurrency markets, as it showed the existence of a correlation with the traditional money markets.
And the chief economist at the International Monetary Fund, Gita Gopinath, had stated that she doubted the possibility of inflation falling to 2 percent, by the end of 2022, as expected by Treasury Secretary Janet Yellen in particular.
