The Federal Reserve of the USA gave this Wednesday a sign of reversal of its ultra-loose monetary policy from the COVID-19 erato intensify its fight against persistent inflation, by announcing the first in a series of planned interest rate hikes this year.
In the statement issued by the entity, considered that further rate increases will be necessary of interest in the future. In addition, the Fed forecasts an inflation of 4.3% in 2022 in the US.
The change of posture, with a increase of a quarter of a point in the reference rate to one day, it has been preparing since last year and has already raised the cost of mortgages for homes in the US and other types of reference credit, in anticipation of what the Fed will do to curb prices that last Thursday they showed their largest annual increase in 40 years.
The Fed considers that other additional interest rate increases will be necessary
The urgency surrounding this week’s Fed policy meeting intensified as the inflation has shown no signs of easing and could even increase even more as a result of Russian invasion of Ukrainewhich fueled a surge in oil prices this month.
The chairman of the Fed, Jerome Powellacknowledged that the central bank is on uncertain ground, that perhaps more reminiscent of the high inflation days of the 1970s than the weak inflation environment that has conditioned monetary policy since the early 1990s. The Federal Reserve projected that rates will be in a range between 1.75% and 2% at the end of the year, an aggressive stance against the inflation that will push borrowing costs to restrictive levels in 2023.
With the rate hike, the Fed signals an aggressive turn on inflation
In a new monetary policy statement, marking the end of the US central bank’s all-out battle against the coronavirus pandemic, the Fed emphasized the huge uncertainty faced by the war in Ukraine and the current health crisis, but still said that “continued increases” in rates “will be appropriate” of federal funds for curb the highest inflation in 40 years.
The statement withdrew direct reference to the coronavirus pandemic, but mentioned the war in Ukraine as putting “additional upward pressure on inflation” and weighing on economic activity.
The rate path of interest in the new projections of the authorities is harder than expectedreflecting the Fed’s concern over inflation that has moved faster and threatens to be more persistent than anticipated, and jeopardizes the central bank’s hope of an easy exit from pandemic emergency policies.
Even with the rate tightening now planned, the inflation remains above the Fed’s 2% targetat 4.1% this year and falling to just 2.3% in 2024. The economic growth forecast at 2.8% this year, a strong fall from the 4% expansion projected in December.
The unemployment rate is now expected to fall to 3.5% this year, stay the same next year and rise slightly to 3.6% in 2024.
The new statement says the Fed expects to start cutting its nearly $9 trillion balance sheet “at an upcoming meeting.” Saint Louis Fed President James Bullard was the only one who disagreed with the Fed’s decision.
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