Posted Jan 26, 2022, 8:36 PMUpdated on Jan 26, 2022 at 10:21 PM
A tightening of monetary policy, but at what pace? The Federal Reserve gave an initial response on Wednesday. The US central bank has kept rates unchanged (between 0 and 0.25% since March 2020), but “with inflation well above 2% and a solid labor market”, it will “soon be appropriate to raise the target range the federal funds rate,” she said after her monetary policy meeting. “The committee is of the opinion to raise the federal funds rate at the March meeting,” said Jerome Powell, its chairman, at a press conference.
The stage prior to the rate hike will have been completed by then: “the Committee has decided to continue to reduce the monthly pace of its net asset purchases, to end it at the beginning of March”, indicated the Fed. These asset purchases, which served to smooth the circuits during the pandemic, swelled the balance sheet of the Federal Reserve – around 9,000 billion dollars.
Reduction for balance sheet
Reducing the size of the balance sheet will be the third step in the normalization of monetary policy, and the Fed has begun to define its contours. It “will begin after the process begins” to raise rates, she said. While the financial markets are worried about it, Jerome Powell wanted to give some visibility, specifying that it would probably still take at least one meeting after the one in March to discuss the terms.
The move could then be a little faster than in the previous cycle, he said, citing shorter maturities of assets held, higher inflation and a stronger economy. “We want an orderly and predictable process,” he said, recalling that a good monetary policy was made up of “anticipation”.
Wall Street closed the session in dispersed order, with a Dow Jones index yielding its gains for the day (-0.38%), and a Nasdaq at equilibrium (+0.02%).
Inflation at its highest
The central bank has been forced to review its analysis of the economic situation in recent months, and now displays the return to price stability (2% over the long term) as its priority. The rise in consumer prices, initially considered “transitional”, accelerated throughout last year, reaching a high for forty years, at +7% over one year in December.
The Fed favors another indicator (the PCE) showing a slightly less steep rise in prices (+5.7% over one year in November, and +4.7% excluding energy and food), but which nevertheless follows the same trend . And Jerome Powell acknowledged that the risks on inflation were rather “bullish”.
The job market, on the other hand, recovered much faster than expected, with the unemployment rate down to 3.9% of the working population in December, close to its pre-pandemic level (3.5% ). The President of the Fed considered in this context that a rate hike could be made “without compromising” the labor market.
Growth revised down
Figures for GDP growth in the fourth quarter and in 2021 will be released on Thursday. The International Monetary Fund has just revised its growth forecast for 2022 in the United States significantly downwards, to 4% against 5.2% expected last fall.
A revision which takes into account the expected tightening of monetary policy, and the difficulties of Joe Biden in passing his social reforms (amounting to 1,800 billion dollars) in Congress. But the sources of price increases remain numerous, between the shortages of employees and the rebound in oil prices (to more than 85 dollars for a barrel of WTI).
The next meeting of the monetary policy committee will be held on March 15 and 16. The minutes of the January meeting, which will be published around mid-February, will also be scrutinized by the markets.