The mighty Federal Reserve could announce tonight, after these two days of talks, that rates will begin to be raised in March, at the next meeting.
It’s the big day for the American central bank (Fed): it should give the signal on Wednesday for a rate hike in March, the first in two years, in order to counter inflation with the risk of new turmoil in the markets. .
The meeting of the monetary policy committee (FOMC), which began Tuesday morning, resumed Wednesday “at 09:00 (14:00) GMT, as planned,” said a spokesman for the Fed. A press release will be issued at 2:00 p.m. (7:00 p.m. GMT) and Fed Chairman Jerome Powell will hold a press conference at 2:30 p.m. (7:30 p.m. GMT).
The mighty Federal Reserve could announce that rates will start to rise in March, at the next meeting.
Key rates had been lowered within a range of 0 to 0.25% in March 2020, in the face of the COVID-19 pandemic, to support the economy through consumption.
Officials at the monetary institution will also say whether they fall 25 basis points or directly 50 points, pushing overnight rates to a range of 0.25 to 0.50%, or 0.50 at 0.75%. They should also specify how many increases they envisage for 2022 and how far they will raise these rates.
“We still expect two key rate hikes in the first half of 2022 and none in the second half, as inflation fears should ease,” said Steve Englander and John Davies, economists for Standard Chartered Bank, in a note.
“But until inflation noticeably slows, there is a risk that the Fed will say and do more, rather than less,” they warn.
Slow down demand
The Fed had groomed the ground at its previous meeting in mid-December, announcing that it would end its asset purchases earlier than expected, starting in March instead of June.
It had also, for the first time, ceased to qualify as “temporary” this inflation which has been, for months, well above its long-term objective of 2%.
Prices have climbed 7% in 2021, their fastest pace since 1982, according to the CPI index. The Fed favors another indicator of inflation, the PCE index, whose data for 2021 will be published on Friday.
Raising overnight interest rates should temper inflation by slowing strong demand.
These federal funds rates determine the cost of money that banks lend to each other, and raising them therefore makes credit more expensive. However, if credit is more expensive, individuals and companies consume or invest less, bringing down the pressure of demand and therefore inflation.
The Fed had so far been cautious about increases, fearing that this would slow down the economic recovery too abruptly and, by extension, the job market.
But the country has now almost returned to full employment, with the unemployment rate falling in December to 3.9%, close to its pre-crisis level (3.5%), with a labor shortage work that places employees in a position of strength in relation to employers.
Debt of emerging countries
The Fed’s announcements could cause new upheavals in the stock market, with the fear of a correction. European markets unscrewed on Monday, Wall Street plunged to the lowest in months.
The magnitude of the fall could even push the Fed to slow down the movement, warns economist Joel Naroff: “If the stock markets continue to weaken, (…) I do not know what (the monetary committee) will do when of the March 15 and 16 meeting.
“I was expecting a show of strength, with 50 basis points in March, but that might be off the mark,” he said.
Too rapid a rise in rates could also penalize emerging and developing countries, whose debt is denominated in dollars, the International Monetary Fund (IMF) has been warning for months.
“It’s going to be a challenge for central bankers this year to be able to communicate the transition to tighter monetary policy. And they have to handle it carefully,” IMF chief economist Gita Gopinath told AFP.
She also said she doubted that inflation would drop to 2%, the Fed’s target, by the end of 2022, as Treasury Secretary Janet Yellen notably anticipates.
The IMF has revised down its growth forecast for the United States, expecting 4.0% for 2022, against 5.2% previously expected.