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Washington (AFP) – Stop inflation: the US Federal Reserve (Fed) is preparing to raise its key rates to fight against soaring prices, and will decide, at its meeting on Tuesday and Wednesday, the pace and extent of the movement.
The ball is in the court of the central bank to slow demand and temper inflation because its key rates set the tone for commercial banks to set their interest rates. However, if credit is more expensive, individuals and businesses consume or invest less.
“A signal” is thus expected as to “when the first rate hike will take place, a priori at the meeting (of the Fed) in March”, according to economist Joel Naroff. “If that’s the intention, it would be nice if the team that suddenly discovered inflation made that clear,” he quipped.
Because the surge in prices last year surprised economists, and Fed officials recently marked a sudden reversal on the subject, worried about inflation which they then ceased to consider as “temporary”.
In December, the institution accelerated the pace of reducing its asset purchases with the aim of stopping them in March, three months ahead of the initial schedule. These injections of liquidity had made it possible to support the economy during the crisis, and bringing them to zero is a prerequisite for being able to raise key rates.
Rise in March, or from January?
“I think (Fed officials) will make it clear that the reduction (in asset purchases) will end in time for them to raise rates at the March meeting,” David told AFP. Wessel, economist for the Brookings Institution.
Key rates had been lowered to zero in March 2020 when the Covid pandemic broke out to stimulate consumption, the engine of the American economy. But demand is now very strong, and faces a supply that does not follow, because of global supply difficulties.
As a result, prices are rising, and inflation has reached 7% in the United States in 2021, the highest for nearly 40 years.
Market participants overwhelmingly (94.4%) expect the Federal Reserve to keep its overnight rate between 0% and 0.25%, according to the valuation of futures products. CME Group.
Some, however, are betting on a quarter-point increase (25 basis points) as of this week, without waiting for March.
“The debate around the Fed’s very short-term outlook is intensifying again,” notes Krishna Guha, economist for Evercore, an investment advisory firm. Among the speculations: “a sudden stop (of asset purchases) and maybe even a rate hike” this week.
Another hypothesis: “a disproportionate increase of 50 basis points at the March meeting”, he underlines. That is to say, all at once to bring key rates, currently between 0 and 0.25%, to a range of 0.50 to 0.75%.
“I don’t see a 50 basis point rise in March, we haven’t prepared the markets for something so spectacular”, had however recently tempered one of the governors of the Fed, Christopher Waller, referring to a up 25 points in March.
“If inflation doesn’t seem to be coming down, that would definitely be in the toolbox, but it would take a lot for us to move in that direction,” he added.
The fight against inflation will require a “long-term” effort, warned Joe Biden on Wednesday, judging “appropriate” for the Fed “to recalibrate (its) support”.
The institution was reluctant to raise its interest rates too soon, so as not to weigh on employment. But according to Joel Naroff, “we are already at full employment”.
The unemployment rate fell in December to 3.9%, approaching the 3.5% before the pandemic. GDP growth for 2021 will be announced the day after the Fed meeting on Thursday and is expected around 5 or 6%.
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