The US Federal Reserve faces a decisive due Wednesday; He must increase his main interest rates to combat inflation two years following cutting them to zero to combat the consequences of “Covid 19”, at a time when economic prospects are once more clouded by the war in Ukraine.
The goal of the US Central Bank’s move is to compel commercial banks to impose higher interest rates on loans granted to their customers in an effort to slow consumption, and thus reduce pressure on prices, especially in light of expectations that supply problems will continue for months, which negatively affects economic growth rates.
With inflation reaching its highest level since 1982, the Federal Reserve, which holds its monetary policy meeting on Tuesday and Wednesday, will seek to unleash this dynamic.
The head of the “Reserve”, Jerome Powell, expressed a short time ago his confidence in the institution’s ability to ensure a “soft landing” for the economy that would allow “inflation to be controlled without causing deflation.” However, the “reserve” will have to move with caution in this very sensitive issue.
“The coincidence of higher inflation and slower growth poses a dilemma for (the Federal Reserve),” economists at Wells Fargo Bank explained in a note.
They are likely to give priority to slowing down inflation, especially since it “gained more credibility during the past decades as a guardian of price stability.” Experts expect 6 interest rate increases of a quarter of a percentage point (0.25 percent) in 2022.
The administration of US President Joe Biden believes that the ball is now in the court of the “Federal Reserve”, and Treasury Secretary Janet Yellen promised that it was “appropriate” for the central bank to move, stressing, Thursday, in statements to “CNBC” that it is also waiting “ soft landing.”
The main interest rates since March 2020 range within a low margin between zero and 0.25 percent, 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.
Yet Jerome Powell was very clear during a congressional hearing in early March; “I am inclined to suggest and support an increase in interest rates by 25 basis points,” he said.
No one in the market expects an increase of half a point, but almost everyone (95.9 percent of customers) favor only a quarter of a point, while others expect to keep interest rates at their current level, according to 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.
The annual inflation rate in the United States rose to 7.9 percent 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 relies on another indicator, the Personal Consumption Expenditure Price Index, which recorded an annual increase of +6.1 percent during last January.
All of this raises fears of a repeat of the inflation crisis, which exceeded 10 percent during the seventies and the beginning of the eighties, when the Federal Reserve increased its interest rates by up to 20 percent, which allowed to slow down the rise in prices, but plunged the country into an economic downturn.
Economists at Wells Fargo stated that “the seventies, when the (Federal Reserve) decision-makers had to organize 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 entering 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) pledged, like other central banks, to avoid a repeat of the 1970s.”
The US job market is currently 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 gradually eliminating billions of dollars in Treasury bonds and other assets it has purchased since March 2020 in order to support the economy.
