The FOMC “is of the view to raise the federal funds rate at the March meeting, assuming the conditions are appropriate to do so,” said Jerome Powell, without specifying the size of the increase.
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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 (Fed) monetary policy committee “is of the view that the federal funds rate should be raised 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 “early March”, just before its next meeting, to its asset purchases, a sine qua non condition for raising rates.
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.
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.
This announcement was eagerly awaited. The prospect of an upcoming rate hike had unscrewed European markets Monday and Wall Street had plunged to the lowest in months.
The publication of the Fed’s press release initially caused the Nasdaq to jump by more than 3% before a more moderate reaction.
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 indeed 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 about increases, fearing that this would slow down the economic recovery too abruptly and, by extension, the job market.
But now the labor market is “very, very strong and my deep feeling is that we can raise rates without seriously hurting it,” the chairman of the mighty Federal Reserve said.
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 considerably,” noted in its press release the Fed, one of whose two mandates is to promote full employment.
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 rise in rates could penalize emerging and developing countries, whose debt is denominated in dollars, the International Monetary Fund (IMF) has been warning for months.
Its chief economist, Gita Gopinath, also said she doubted that inflation would drop to 2% by the end of 2022, as Treasury Secretary Janet Yellen notably anticipates.
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