U.S. Central Bank President Jerome Powell in the Senate in Washington, January 11, 2022 (POOL/Brendan Smialowski)
The US central bank has signaled its intention to raise its key rates in March, noting the improvements on the employment front and high inflation which could persist.
The Federal Reserve’s (Fed) monetary policy committee “is of the view to raise the federal funds rate at the March meeting, assuming conditions are appropriate to do so,” the chairman said. institution, Jerome Powell, during a press conference, without specifying the extent of this planned increase.
This unusually precise comment came to supplement the press release published earlier, at the end of the regular meeting of the institution.
The Fed had indicated that it would raise rates “soon”, while adding that it would end its asset purchases – a sine qua non for raising rates – “in early March”, just before its next meeting.
And the institution is, said Mr. Powell, ready to reduce “earlier” and “perhaps faster” than after the 2008 crisis, its balance sheet, inflated by two years of asset purchases. In other words, let them reach their maturity without renewing them.
Key rates had been lowered to a range of 0 to 0.25% in March 2020 when the Covid-19 pandemic spread to the United States, plunging the economy into the doldrums. The objective was to support consumption.
The Fed building in Washington, January 22, 2022 (AFP / Stefani Reynolds)
But now the priority is to slow inflation. By raising rates, the Fed wants to moderate demand.
If Jerome Powell bets on a slowdown in inflation in 2022, this should however take time. He also warned of the “risk of prolonged high inflation”. “There is a risk that it will accelerate even more”, he even estimated.
– Wall Street reaction –
Because the global supply difficulties which cause delays and shortages and drive up prices, will not be resolved by the end of the year, he judged, even if progress should be “made during of the second semester.
The prospect of a rate hike had unscrewed European markets Monday and Wall Street had plunged to the lowest in months.
On Wednesday, the Nasdaq initially climbed more than 3% before a more subdued reaction, and Wall Street finally ended the session in disarray.
This less accommodating posture of the Fed pushed up the dollar against the euro, which fell to its lowest level in six weeks at 1.1249 dollars per euro (-0.46%) around 8:00 p.m. GMT.
Key rates of the American Central Bank (Fed), in %, since 2005 (AFP / )
The announcement, however, was not a surprise. The Fed had groomed the ground at its previous meeting in mid-December, announcing that it would end its asset purchases earlier than expected.
It had also, for the first time, ceased to describe this inflation as “temporary”.
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.
– Debt of developing countries –
The Fed had so far been cautious on increases, fearing that this would slow down the economic recovery too abruptly and, by extension, the job market.
But the latter is now “very, very strong and my deep feeling is that we can raise rates without seriously hurting it,” said the chairman of the powerful Federal Reserve.
Jerome Powell, however, did not mention the persistent inequalities on this front, and in particular a still much higher unemployment rate among black Americans. However, the Fed insisted regularly, at the start of the economic recovery, on the “inclusive” job market that its officials wanted to achieve before considering raising rates.
“Job gains have been solid in recent months and the unemployment rate has fallen significantly,” noted in its statement the Fed, one of whose two mandates is to promote full employment.
Employees work at a cafe in Union Station in Washington, July 30, 2021 ( GETTY IMAGES NORTH AMERICA / Kevin Dietsch )
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 which places employees in a position of strength in relation to employers.
Raising rates is proving to be a delicate task since the risk is also to slow down growth.
In addition, outside the United States, too rapid a rate hike could penalize emerging and developing countries, whose debt is denominated in dollars, the International Monetary Fund (IMF) has been warning for months.