President of the American central bank Jerome Powell, during a press conference on February 1, 2023, in Washington (AFP/SAUL LOEB)
Inflation has started to decline in the United States, but the work of the American central bank (Fed) is far from over, assured its president on Wednesday, while the institution raised its rates by a quarter of point and is considering further increases.
The Fed raised its key interest rate for the eighth straight time on Wednesday, but slowed the pace from previous hikes.
This first meeting of the year marks a return to the more usual quarter-point rhythm. But further increases are to be expected, the institution warned.
“We are talking about a few more rate hikes to get to the level that we think is restrictive enough,” said the institution’s president Jerome Powell, during his press conference.
Because if the situation improves on the inflation front, it is too early to claim victory.
The Fed’s key rate (AFP/Patricio ARANA)
We are seeing “the beginning of disinflation”, said the Fed Chairman, but “inflation remains high”, and the tightening of monetary policy takes time to fully take effect.
Thus, “although recent developments are encouraging, we will need more evidence to be convinced that inflation is slowing down for a long time”, he insisted.
Wall Street welcomed Jerome Powell’s modest rate hike and balanced tone, and ended in the green on Wednesday.
– “Small steps” –
“The statement highlights that things are moving positively, but the Fed is taking baby steps,” said Ian Shepherdson, chief economist for Pantheon, in a note.
Rates are now in a range of 4.50 to 4.75%. They should remain at a high level for a while, to continue to dampen economic activity and contain the rise in prices.
Indeed, if the economy slows down and inflation falls “slowly” as expected, it will not be “appropriate to cut rates this year or to ease monetary policy”, also warned Jerome Powell.
The rise in consumer prices fell in December to 5.0% over one year against 5.5% in November, according to the PCE index, which the Fed wants to bring back to around 2%.
During Jerome Powell’s press conference on February 1, 2023 in Washington (AFP / SAUL LOEB)
Another measure of inflation, the CPI index, on which pensions are indexed, also showed a sharp slowdown in December, to 6.5% against 7.1%.
The Fed is also continuing to reduce its balance sheet, a movement that began in June, after having, during the Covid-19 pandemic, bought securities to flood the market with liquidity and allow it to continue to operate.
The Fed’s monetary policy committee, the FOMC, also, in the press release published after its meeting, noted that “recent indicators show moderate growth in spending and production”.
– Possible to avoid recession –
The purpose of the rate hikes is to induce the banks to raise the interest rates on loans to households and businesses, in order to slow down consumption and therefore prevent prices from continuing their vertiginous escalation.
But with consumption driving the US economy, too much tightening could lead to a recession.
Jerome Powell considers it possible to “return to inflation of 2% without a really significant slowdown or a really significant increase in unemployment”. But it would also be “quite possible” to see unemployment, currently at 3.5%, climb to almost 5%, he also stressed.
The unemployment rate in the United States (AFP/Archives/Jonathan WALTER)
The state of the labor market is being watched closely by the Fed, after two years of labor shortages that drove up wages, in the midst of high inflation.
Official employment figures for January will be released on Friday. The unemployment rate could rise to 3.6%, a level however still among the lowest of the last 50 years. The number of job creations is expected to slow down to 187,000 from 235,000 in December, according to the consensus of Briefing.com.
A figure, published Tuesday by the Department of Labor, had seemed to persuade economists that inflation was now permanently on the right track: the average cost of an employee, with an increase in the fourth quarter less strong than those of the previous quarters.
Thursday is the turn of the ECB to meet. The European institution started later than the Fed to raise its rates. It should raise them again, and even hint at further increases.
© 2023 AFP
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