2023-06-13 03:45:00
After increasing its key rates ten times in a row since March 2022, the Fed could wait until its July meeting to raise its key rates by 25 basis points. Its main key rate is now in a range of 5% to 5.25%, a record since 2006. In March 2020, they were between 0% and 0.25%. Whether this Wednesday or July, analysts believe that this will be, for 2023, the last of the actions of the monetary tightening policy of the American central bank, which has led a movement followed by its European counterparts. The Fed has already given up reducing the size of its balance sheet to save regional banks from bankruptcy last March.
The underlying inflation resistance
It took less than a year for the Fed to bring core inflation – ie excluding the impact of economic developments – from 6.6% to 4.1%. The employment outlook, which was less favorable in May (unemployment rose by 0.3% to 3.7%), could augur a reversal of the upward trend in wages at the heart of US inflation. Even though the inflation rate is well above the 2.1% average recorded between 2000 and 2020, the fundamentals of the American economy justify a pause. Which implies that the country would put up with inflation above 2%, a configuration that Fed Chairman Jerome Powell swept aside again last month.
The European Central Bank also continues to display a categorical target of 2%. This is why the Frankfurt institute, which started in July 2022, i.e. after the Fed, its rate hikes, should logically tighten its rates for a few more months. It will probably announce an eighth increase in June and then in July, renewing the rate of 0.25% (rather than 0.5%) that it had favored in May. The ECB has a margin compared to its American counterpart: the key rates are “only” from 3.25% to 4%.
It should be remembered that the euro zone posted nearly 11% inflation in September 2022, which is much more than the United States. The difference in their trajectory was essentially linked to the rise in the prices of energy and raw materials caused by the war in Ukraine, which weighed on the European economy. Since then, a price-wage inflationary spiral has set in, which justifies the ECB’s monetary policy.
What does it cost?
The Fed today, the ECB tomorrow, have settled on a structural inflation threshold of 4%. This will be supported, in the long term, by the costs induced by the energy transition and the rise in wages – which cannot be revised downwards, according to a classic ratchet effect. The question today is to estimate the collateral damage of each percent gained to arrive at 2%. Even fewer credits, with all the consequences in terms of consumption and access to housing that this entails? The middle classes would be the first victims of even more restrictive monetary policies, which rhyme with recession. The electoral cost would be heavy.
The future could see the sacrosanct 2% become 2.5%, why not 3% structural inflation. This new standard would shake the very spirit of financial stability as conceived by the promoters of the euro zone. It remains to be seen whether it would not offer growth opportunities.
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