The US central bank (Fed) kept interest rates low on Wednesday, but expects to raise them as early as March due to improvements on the jobs front and high inflation.
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“With inflation well above 2% and a strong labor market, the (Monetary Policy, Editor’s note) Committee expects it will soon be appropriate to raise the rate target range,” the Reserve explained. (Fed) in a press release published after its meeting.
Officials of the institution said it would end its asset purchases “early March”, a sine qua non for raising rates. An increase could therefore occur during its meeting scheduled for mid-March.
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 will moderate demand.
“Solid” job gains
“Economic activity and employment indicators have continued to strengthen,” the Fed said in its statement.
She adds that the sectors most affected by the pandemic, including services, “have improved in recent months” even if they are affected by the recent sharp increase in cases of infection with the Omicron variant.
“Job gains have been solid in recent months and the unemployment rate has fallen considerably,” further notes the institution, one of whose two mandates is to promote full employment.
But “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to high levels of inflation,” she says.
However, it signals a reduction in supply constraints, which should help to slow inflation.
This announcement was eagerly awaited, and the prospect of an upcoming rate hike had unscrewed European markets on Monday, and Wall Street plunged to its lowest level in months.
The publication of the Fed’s press release initially caused the Nasdaq to jump by more than 3% before tempering its 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 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.
However, raising rates is not without risk since it could slow down growth and the recovery of the job market.
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 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 anticipated in particular by Treasury Secretary Janet Yellen.