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These Tuesday and Wednesday, members of the US Federal Reserve meet. Faced with galloping inflation, they will decide to raise interest rates. But how much, and how many times a year? The Fed will also have to take into account the risks of stagflation and recession.
For months, the economic world has been expecting this meeting, at which the Federal Reserve (the central bank of the American federal state), or the Fed, will decide whether and how much to raise interest rates. . At the beginning of February, she had decided to continue to observe the situation, but two weeks ago, the chairman of the Fed, Jerome Powell, had somewhat spoiled the surprise and announced before Congress an increase in interest rates.
But by how much will they be increased? For this element, speculations vary between 0.25 percentage points and 0.5 percentage points (pp). But the task is delicate: many voices fear that too harsh a brake could inflict a severe blow on the economy, already under pressure due to inflation. This is particularly inflated by energy prices, which are likely to remain high for a long time yet, especially because of the war in Ukraine.
The main fear is that a too rapid increase will slow down the post-covid recovery (for which interest rates had been lowered), and that the cocktail of prolonged high inflation with a slowdown in growth will set in. place, which could plunge the United States into the doldrums of stagflation or even recession.
So much for the elements that the Fed will have to take into account. So what are the measurements on the table?
Interest rate : 0,25 pp?
- The market overwhelmingly expects a 0.25pp increase, and the Fed doesn’t like to surprise markets, CNCB reports. 0.5 pp would indeed be a shock wave in an already very volatile stock market. The 0.25 pp are therefore very probable.
- But for the future, nothing is still very certain. How many more interest rate increases will there be in 2022? The market expects three or four, but seven in total would be possible. By how many percentage points will the rate be increased each time? It still doesn’t seem clear either. But Fed members should at least address the subject and make some projections.
- Three months ago, Fed members mapped out a roadmap for interest rate hikes: three in 2022, and six in the following two years. Eventually, the rate should then reach 2.5%. But this draft will undoubtedly be revised upwards.
The buyback program and the balance sheet: stopping one, decreasing the other?
- Since the pandemic, the Fed has been buying bonds massively – another economic support measure for the recovery. But today it finds itself with assets of almost $9 trillion on its hands, which is unusually high.
- It had already been decided to stop the buyback program in March, after a gradual reduction for several months. A final installment of $16.5 billion is planned for this month.
- For this meeting, however, a decision on the reduction of the balance sheet is not expected. But the subject could nevertheless be broached. From May-June, more concrete measures could be announced, believe sources in the financial sector interviewed by CNCB. The Fed should then get rid of the bonds in the summer, to the tune of 100 billion dollars per month.
In sum, in the face of these uncertain times, expectations for this meeting are rather on moderate measures. The verdict is expected for Wednesday evening.