The US Federal Reserve (Fed) is “determined to stay the course” on tight monetary policy until inflation returns to its expected level of 2% even if that results in “weak growth in 2023”, it said. estimated Thursday in a speech Lael Brainard, vice-chairman of the Fed.
“Inflation has slowed in recent months, which is important for American homes and businesses. But inflation remains high and it will take time to bring it down to 2%. We are determined to stay the course,” Ms. Brainard said during a speech at the University of Chicago School of Economics.
Inflation slowed to 6.5% year on year in December, hitting its lowest level in 2022 after peaking at 9.1% year on year in June.
New York Fed Chairman John Williams also said at a separate event that inflation was still too high and that lowering prices would require “a period of slow growth and a weakening labor market conditions”.
If the Fed has already acted vigorously, “it is obvious that monetary policy must go even further”, he remarked, anticipating for 2023 GDP growth of around 1% and an unemployment rate around 4.5%.
At its last meeting in mid-December, the Fed reduced the amount of its hikes, raising its main key rate by half a percentage point, which is now in a range of 4.25% to 4, 50%.
If central bank officials plan to push it above 5% and hold it high for a while, the desire now is to tighten the screw more slowly than during the first phase.
Admittedly, the effects of the rate hike are still not fully felt on economic activity, but Ms. Brainard noted “the significant weakening of the industrial sector” and “a further moderation in consumer spending”.
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“Disposable net income fell 4.1% over the first nine months, suggesting that current consumption is primarily driven by savings and credit,” she said.
However, household savings, especially smaller ones, have largely shrunk and the “tightening of both monetary and fiscal policy in a global environment” is expected to lead to weaker growth in 2023, Ms Brainard pointed out.
However, the labor market continues to resist, despite a slightly lower level of employment than before the pandemic, which Ms. Brainard explains in particular by a drop in immigration and an increase in retirements.
Finally, salaries have certainly increased significantly but are distributed in different ways. The increases obtained by low wages were compensated “by a fall in real wages among upper middle incomes”, which made it possible to avoid feeding the price-wage spiral feared by economists.