Fed plans three rate hikes in 2022, as inflation slumps Americans’ purchasing power

Major shift of the Fed: the American central bank announced Wednesday, December 15 that it foresees three interest rate hikes for 2022, at the end of the two days of meeting of its monetary policy committee. The Fed’s key rates, which set the rent on money in the short term, have remained pegged between zero and 0.25 since the start of the Covid-19 pandemic in March 2020, but the path to faster normalization than expected is plotted: Fed members predict that key rates will average 0.9% by the end of 2022, a figure well above their September forecast of 0.4%. At the end of 2023, the money rent would rise to 1.6% with two increases planned for the year, then 2.1% in 2024 (two increases too) and 2.5% in the long term.

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This turnaround is explained by the rise in inflation, which weakens the purchasing power of Americans and turns into a thorn for the presidency of Joe Biden. Long described as temporary or transient, it is settling in the United States: the rise in prices reached 6.8% in November, unheard of since 1982, and now concerns all economic sectors. Initially, inflation was confined to bottlenecks that hindered the restart of the economy (freight, semiconductors, raw materials) but this phenomenon created problems “Larger and more durable than anticipated”, Fed President Jerome Powell admitted at a press conference.

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The fear of an inflation-wage spiral is not completely ruled out, as the unemployment rate fell faster than expected, to 4.2% in November, and the labor shortage is felt . “Wages have been dynamic but, so far, rising wages [qui a atteint 4,8 % sur un an en novembre] was not a major contributor to inflation ”, said Mr Powell, the ” until now ” being a caveat important. “We are careful that a rise in wages above productivity can put upward pressure on inflation”, he continued.

The fear of an inflation-wage spiral is not excluded, as the unemployment rate fell faster than expected, to 4.2% in November, and the labor shortage is felt

Mr Powell, who was reappointed by Joe Biden for a second four-year term, effective 1er February, is very cautious about the economic upheavals linked to the pandemic. The good performance of employment, measured by the unemployment rate, masks a less satisfactory phenomenon, the drop in the participation rate of Americans in employment: this is explained by the aging of the population and the reluctance to ” some Americans are returning to work, for fear of Covid-19 and / or because they have financial reserves accumulated during the crisis, for lack of being able to spend and thanks to social and fiscal transfers. This shortage can lead to inflationary pressures.

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